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Kentucky Milk Case
Each year, Kentucky invites bids from dairies to supply half-pint containers of mild products to its school districts. The products include whole milk, low-fat milk, and low-fat chocolate milk. In 13 school districts (called Tricounty) , the suppliers were accused of price-fixing – conspiracy to allocate the districts so that the “winner” is predetermined.
Between 1983 and 1991, two dairies – Meyer dairy and Trauth dairy – were the only bidders in these 13 school districts. Consequently they were awarded all the milk contracts in these districts. (In other districts, called Surround, a large number of different dairies won the contracts).
You have data available from 392 bids (between 1983 and 1991) to determine if there is evidence of bid collusion. What analysis will you run, and what do you conclude.
Background Information
Certain economic features of a market create an environment in which collusion may be found. These include:
- Few sellers and high concentration. Only a few dairies control all or nearly all of the milk business in the market.
- Homogeneous products. Products sold are essentially the same from the buyer’s perspective (i.e. school district).
- Inelastic demand – demand depends on school enrollments, not price
- Similar cost structure of dairies – 60% of dairy’s production cost is raw milk, which is federally regulated. Meyer and Trauth are of similar size, and both buy milk from the same suppliers.
Questions (Part 1 – In class)
- What is the unit of analysis in the data?
- What is the measurement level of all the variables?
- What are the likely indicators of collusive market practices?
- What statistical analyses will be helpful in determining if collusion is happening?
Questions (Part 2 – Take home)
Prepare a brief report to the Attorney General of Kentucky, giving your opinion about whether Meyer and Trauth colluded in fixing prices.
Please present your statistical analysis that supports your opinion. Note: You can use either STATPAD or EXCEL (or any other software) in running the statistical analysis and appropriate charts and graphs. Note: Please restrict your analysis to a maximum of 5 pages including any exhibits. You must hand me a printed copy of your analysis, with any charts, graphs or tables you deem necessary.