Ohio v. Trauth

Bidding, Bid Rigging, and School Milk Prices

Rebecca Adkins Chelsea Block Gracie Randall

Market Structure

 600 school districts  Demand is relatively inelastic  Processors receive milk from dairy farms Standardize butter fat and distribute to schools

Market Structure

Market Structure

 Players:  Thirteen dairies  Meyer Dairy and Coors Dairy  Trauth Dairy  The State of Ohio  Scheme  Bid-rigging  “respecting incumbencies”  Economic Evidence  Incentives to collude  Behavior consistent with competition or collusion?

 Extent of damages

Timeline of Events

1980-1990: Bid Rigging 1988: Florida Bid Rigging Case 1993: Confession to Bid Rigging 1993: DOJ clarifies Corporate Leniency Policy 1994: 13 Dairies Charged 1995: Failed Conspiracy Case 1996: Settlement

Factors Facilitating Collusion

1. Firms Compete Only on Price 2. Announcement of Bids 3. Variation in Auction Dates 4. Predictability of Demand 5. Easily Defined Markets 6. Small and Stable Set of Firms 7. Similar Cost Structures 8. Contact Between Competitors in Multiple Markets 9. Availability of Competitor’s Prices 10.Frequent Customers of One Another 11.Existence of Trade Associations

Competitive Model: Deciding Factors of Bid Submission

1. Transportation Costs 2. Distance from District 3. Type of Firm 4. Size of the School District 5. Efficiency of Production Under Contract Terms

Competitive Model

 Two decisions:  Submit a bid?

 Level of bid?

 Strongest factor: distance

Competitive Model

Competitive Model

Effect on Prices Paid

Prices increased

6.5%

From the competitive model

Defendants’ Behavior

 Behavior statistically significantly differs from control group  Doesn’t necessarily mean collusion  Bid on districts farther away than model suggests  Test for independence/zero correlation  Bid levels differ from competitive model  Hypotheses of independent action vs. complimentary bidding

Defendants’ Response

•Firms disagreed with this interpretation of the evidence •Incomplete list of explanatory variables •Incohesive Control Group •Insufficient evidence to distinguish between a conspiracy and a tacit collusion

Summary and Aftermath

   All 13 dairies charged with Collusion Settled in 1996, without trial 1993- DOJ clarified Corporate Leniency Policy  1 st confessor receives amnesty  Doesn’t shield from civil penalties  Hastens collapse of collusive agreements