Executive Summary Milk I 3-4-08
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Executive Summary Milk I 3-4-08

Course Number: ECON 202, Spring 2008

College/University: New Mexico

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The Kentucky Milk Case Report on a Statistical Analysis of a Potentially Collusive Market Environment Stephanie Chu Marcie Malaj Briar Sangiuliano Table of Contents Introduction ............................................................................... 3 Market Shares ........................................................................... 3 Incumbency Rates...

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Kentucky The Milk Case Report on a Statistical Analysis of a Potentially Collusive Market Environment Stephanie Chu Marcie Malaj Briar Sangiuliano Table of Contents Introduction ............................................................................... 3 Market Shares ........................................................................... 3 Incumbency Rates .................................................................... 3 Bid Levels & Dispersion .......................................................... 4 Price Versus Cost/Distance ..................................................... 4 Bid Sequence ............................................................................ 4 Comparison of Average Winning Bid Prices ......................... 5 Conclusion ................................................................................ 7 Appendix ................................................................................... 8 Chu, Malaj & Sangiuliano Kentucky Milk Case 2 4/13/2008 2 The Kentucky Milk Case Report on a Statistical Analysis of a Potentially Collusive Market Environment Between 1983 and 1991, Meyer and Trauth Dairies were the only two bidders in the market for school milk provisions in the Tri-county region of Kentucky, while the 11 other school districts showed a significantly higher number of bidders; this information suggests collusive activity between Meyer and Trauth. After inspection of the bids, data shows that the two dairies were in fact colluding with one another to submit close bids and make the company actions appear competitive. The summary of the results are as follows: 1. Shares % of Market Share % of Market Share Market 1 0.9 Percent of Market Share 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Mey er 1983 Trauth 1983 Mey er 1984 Trauth 1984 Mey er 1985 Trauth 1985 Mey er 1986 Trauth 1986 Mey er 1987 Trauth 1987 Mey er 1988 Trauth 1988 Mey er 1989 Trauth 1989 ThomsonGlass 1989 Mey er 1990 ThompsonGlass 1990 Trauth 1990 Mey er 1991 ThompsonGlass 1991 Trauth 1991 Year Between 1984 and 1988, it is apparent that collusion occurred. The market share for Trauth and Meyer was consistent, where the total number of milk half-pints was nearly equally shared between two major competitors. However, when Thompson-Glass entered the milk market in 1989 as a third competitor, the market shares changed dramatically. There was no longer an equal dispersion of half-pints supplied to the entire market. With a high variability in market shares, collusion is possible. 2. Incumbency Rates Incumbency rates (the same dairy controlling the same school district year after year) were over 88% in Tri-county and 67% in Surrounding counties overall. This is a sign of collusion. Additionally of the 13 districts in Tri-county, 6 had 100% incumbency rates. A rate over 70% is considered a sign of collusion. County Overall Incumbency Rates % of Districts with 100% Incumbency 46% 11% Tri-county Surrounding 3. Bid Levels & Dispersion 88% 67% Collusion is more likely to occur with less variability in the bid levels. To measure variability, we looked at the standard deviation of the bids in sample (Tri-county or Surrounding). In addition, a Chu, Malaj & Sangiuliano Kentucky Milk Case 3 4/13/2008 3 larger deviation indicates a more variable bid level. The average standard deviation for the bids in Tri-county was 0.0139. The average standard deviation for the bids in surrounding counties was 0.0165. Surrounding counties had more variability in bids than Tri-county. Therefore, this can be used as evidence of collusion. 4. Price Versus Cost/Distance. Collusive behavior is evident if bid prices milk of do not correlate with the raw cost of milk, and similarly, if winning bids are not correlated with the distance from bidding diaries. In a competitive market, bid prices should decrease the closer the bidding dairy is to the school district, and likewise, bids should increase the further the bidding dairy is from the district. To compare the bid prices versus mileage from the winning diaries over time, we calculated the profit the dairies made from the bid (Bid Price-Raw Cost), and plotted the profit against the average distance from Meyer and Trauth. In the surround chart, the trendline shows that profits generally increased with distance from the dairies, while the trendline in the Tri-County chart is flatter and much more concentrated. This data suggests collusion in the Tri-County market because total profits did not increase normally with distance from the dairies; this indicates that Meyer and Trauth were not bidding competitively in Tri-County in terms of profit and transportation costs, while the Surrounding counties show a more typical trend in competitive bidding. 5. Bid Sequence In competitive markets, bids tend to decrease as the season progresses. In markets that collude, the bids tend stay somewhat constant or even increase. Below are two years that demonstrate collusive behavior based on the bid sequence. All of the years for Tri-county exhibited similar behavior. In the Surrounding counties, bids fluctuated from 0.10 to 0.18. In Tri-county, bids only fluctuated between 0.11 to 0.16. This small fluctuation in bid sequence indicates that Tri-county and Surround engage in collusive behavior. Chu, Malaj & Sangiuliano Kentucky Milk Case 4 4/13/2008 4 6. Comparison of Average Winning Bid Prices After examining two similar markets, Surrounding counties and Tri-County, the average winning bid prices reveal a "rigged market." In all three markets for milk (low-fat white milk, whole while milk, and low-fat chocolate milk), data for mean winning bid prices is similar. In 1983, Surround had substantially higher average winning bid prices than Tri-County, indicating that there was a rigged market. From 1984 to 1989, Tri-County's mean winning price is significantly higher than the competitor, Surrounding counties, in which collusion occurs. This indicates that the market was "rigged" for these years. However, from 1989-1991, the average winning bid prices for both Surrounding Counties and Tri-County are similar, which suggests a competitive market. Chu, Malaj & Sangiuliano Kentucky Milk Case 5 4/13/2008 5 Mean Prices for Low Fat White Milk 0.2000 Surround Low Fat White Milk TriCounty Low Fat White Mean Price 0.1500 0.1000 0.0500 0.0000 1983 1984 1985 1986 1987 Year 1988 1989 1990 1991 Mean Prices for Whole White Milk Surround Whole White Milk 0.2000 Mean Price 0.1500 0.1000 0.0500 0.0000 1983 1984 1985 1986 1987 Year 1988 1989 1990 1991 TriCounty Whole White Milk Mean Prices for Low Fat Chocolate Milk Surround Low Fat Chocolate Milk Tri County Low Fat Chocolate Milk 0.2000 Mean Price 0.1500 0.1000 0.0500 0.0000 1983 1984 1985 1986 1987 Year 1988 1989 1990 1991 6. Comparison of average winning bid prices. Chu, Malaj & Sangiuliano Kentucky Milk Case 6 4/13/2008 6 Concluding Remarks In conclusion, the statistical data revealed by comparing Tri-County to the Surrounding Counties in terms of market shares, incumbency rates, bid levels & dispersion, price v. cost/distance, and Bid Sequence presents evidence that collusive behavior occurred between the Trauth and Meyer Daries. Appendix 1-6 Chu, Malaj & Sangiuliano Kentucky Milk Case 7 4/13/2008 7

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