porter and zona school milk Rand

porter and zona school milk Rand - RAND Journal of...

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RAND Journal of Economics Vol. 30, No. 2, Summer 1999 pp. 263-288 Ohio school milk markets: an analysis of bidding Robert H. Porter* and J. Douglas Zona** We examine the institutional details of the school milk procurement process, bidding data, statements of dairy executives, and supply characteristics in Ohio during the 1980s. We compare the bidding behavior of a group of firms in Cincinnati to a control group. We find that the behavior of each of the firms differs from that of the control group. We argue that the behavior of these firms is consistent with collusion. The estimated average effect of collusion on market prices is about 6.5%, or roughly the cost of shipping school milk about 50 miles. 1 Introduction * Sometime between May and August every year, school district officials throughout the country independently solicit bids on annual supply contracts for milk and other products. In response to these solicitations, dairies that are in a position to supply school milk submit bids on these procurement contracts. Typically, the low bidder is selected to supply milk in half-pints to the schools during the following school year. As we describe below, the details of the procurement process, the nature of milk processing and delivery, and the characteristics of demand for school milk are such that collusive agreements among suppliers may be relatively easy to reach and maintain. Collusion appears to be a pervasive phenomenon in school milk auctions.1 There have been recent price-fixing investigations of procurement auctions for the provision of school milk in more than twenty states. Guilty pleas have been entered in at least a dozen states, with fines levied in excess of $90 million. About ninety people have been sent to jail, for six-month sentences on average. In State of Ohio v. Louis Trauth Dairies, Inc. et al., thirteen dairies were charged with collusion in school milk auctions for the years 1980 through 1990 inclusive. As * Northwestern University and National Bureau of Economic Research; r-porter@nwu.edu. ** Cornerstone Research; dzona @cornerstone.com. This article is adapted from our reports and statements on behalf of the plaintiff in State qf Ohio v. Louis Trauth Dairies, Inc. et al. The case was settled before it came to trial. We received helpful comments from David Barth, Tim Bresnahan, David Genesove, Lou Guth, Wick Heath, Jim Hosek, Bernard Reddy, and two anonymous referees as well as from the participants in a number of seminars. i See, for example, Henriques and Baquet (1993). Copyright ? 1999, RAND 263
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264 / THE RAND JOURNAL OF ECONOMICS part of that case, bidding data were collected from school districts around Ohio. State- ments from bidders, school district officials, and dairy officials were also gathered. In this article we examine the information collected as part of the case. We discuss whether the behavior of some of the firms operating in school milk markets around Cincinnati is more consistent with competition or collusion. Auctions are an important market institution. The economics literature extensively
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porter and zona school milk Rand - RAND Journal of...

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