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Contents
1. 2. 3. 4. 5. 6. 7. 8. Introduction The Market Characteristics Bid Rigging Mechanism The Competitive Market Model The Behavior of the Defendant Firms Estimating Damages to Schools Conclusion Discussion
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Introduction
Collusion is a pervasive phenomenon in school milk auctions
Guilty pleas in at least a dozen states 90 people sent to jail Fines in excess of $90 000 000
Porter & Zona examine school milk procurement process, bidding data, and supply in Ohio during 1980s, and compare bidding behavior of defendants with a control group The bidding behavior of the accused firms is consistent with collusion Average effect of collusion: 6.5% on market prices
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The Market:
The Nature of Competitive Interaction between Suppliers Each of over 600 school districts in Ohio solicits bids on annual supply contracts of milk Firms that elect to bid submit a list of prices The lowest bid wins Coolers, straws or napkins might be included in the contracts; escalator clauses may be provided Potential suppliers: processors and distributors Entry barrier: the costs of a processing plant
Demand is inelastic
Predictability of demand Competition only on price (homogeneous good) High transportation costs Public announcement of bids and the identity of bidders
Control Group
Bid Submission Decision
Factors affecting the bid submission decision: Probit-Model
Findings: - Processor (+) (Distributor) - Direction (+) - Distance (-)
Control Group
Bid Level Contingent on Submission
Trade-off of higher profit vs. lower probability of winning
Bidding behavior: 1. Variables that contribute to cost
e.g. Distance, Processor/Distributor, # of deliveries
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Control Group
Bid Level Contingent on Submission
Factors affecting the bid level: OLS-Model
Findings: Distance (+) Processor (-) Firms closest to school district have competitive advantage
Bidding by non-defendants is consistent with competitive bidding under standard models of spatial competition.
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For both tests H0 is rejected: behavior by SW Ohio defendants differs from the control group!
But behavioral differences are not necessarily caused by anticompetitive motives !!!
* 1. Compute the predicted bid for the firm based on control group bid estimates; 2. Construct a residual (difference of calculated and real bid), for each district and year (if possible); 3. Regress residuals on the independent variables of the control group equation; 4. F-Test: Are all slope coefficients zero?
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Conclusion
The Main Findings A number of the characteristics of the auction mechanism facilitate collusion Systematic deviations between predicted and realized bids have been observed; the pattern of deviations is consistent with collusion The winning bids of conspirators are higher than competitive bids which causes consumers (taxpayers who subsidize students meals) to overpay for milk by 6.5%.
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Conclusion
Ohio School Milk Procurement vs. New York State Highway Paving
Auctions New York State Highway Construction (Porter and Zona, 1993) Ohio School Milk Procurement (Porter and Zona, 1997)
Similarity Difference
Phony higher bids by ring members unrelated to cost measures No access to conract-specific information Analysis of bid level is not possible Information about school districts and individual contract terms are available Focus on the decisions whether to submit a bid AND on the level of submitted bids
Critique
Descriptive character of the results. A public adoption of the test procedure would incentive cartels to tailor their phantom bids to disguise their collusive behavior.
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Discussion
Henriques and Baquet, Evidence Mounts of Rigged Bidding in Milk Industry (1993): Some of the sharpest questions about corporate tolerance of bid-rigging focused on the fact that many companies were paying their executives' legal expenses in the investigations. "When you have a problem that creeps across state borders like this, you either have upper-management involvement - or you have an upper-management problem," said Mary Sue Terry, the former Virginia Attorney General (). Indeed, that attitude may have been supported through official inaction. How could corporate tolerance of bid-rigging be dealt with? The wave of antitrust scrutiny of the milk industry began in Florida in the mid-1980's, when (authorities) began to apply computerized bid-analysis techniques, initially developed to analyze highway construction bids, to examine milk bidding. () E. Linwood Tipton, president of the Milk Industry Foundation, said he believed the industry's local problems had been exaggerated by the "spotlight" of the Federal prosecutions and state civil suits. "If you put the same scrutiny on any other industry, you'd find a significant number of cases there, too," Mr. Tipton said. "When there are enormous investigatory powers directed at you, it looks like a more abnormal situation than it probably is. Why is collusion pervasive in school milk auctions? How could collusion-facilitating market characteristics be improved?
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Literature
Diana Henriques and Dean Baquet, Evidence Mounts of Rigged Bidding in Milk Industry, New York Times, May 23, 1993, www.nytimes.com/1993/05/23/us/evidence-mounts-of-riggedbidding-in-milk-industry.html, retrieved on 11.11.2012. Robert H. Porter and J. Douglas Zona, Detection of Bid-Rigging in Procurement Auctions, Journal of Political Economy, Vol. 101, June 1993, 518-538. Robert H. Porter and J. Douglas Zona, Ohio School Milk Markets: An Analysis of Bidding, National Bureau of Economic Research, Working Paper 6037 , 1997, 30-33. Robert H. Porter and J. Douglas Zona, Ohio School Milk Markets: An Analysis of Bidding, The RAND Journal of Economics, Vol. 30, No. 2, 1999, 263-288. Michael D. Whinston, Lectures on Antitrust Economics, The MIT Press, Cambridge, Massachusetts, 2006.
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