Ohio Milk Case
OHIO MILK CASE
Introduction There are many different procurement markets in the world. Public sectors often use the system of auctions in order to ensure competition within these markets. Buyers announce their need of a specific good and the date of auction whereby the supplier with the smallest bid gains the contract. Suppliers need a lot of information beforehand in order to be able to react quickly to their competitors’ bids. The system of auctions however often encourages the formation of illegal cartels and price agreements. In the case at hand 600 schools in the area of Ohio demanded school milk. Possible suppliers were all dairies willing and able to supply school milk. During the 1980s the State of Ohio decided to investigate the biddings for the school milk contracts. Thirteen companies were accused and officially found guilty of uncompetitive behaviour such as price-fixing and the foundation of cartels. Later, several experts, such as Porta, Zona and Pesendorfer, found that the suppliers’ bidding behaviour was indeed rather collusive than competitive. We examine the institutional details of the school milk procurement process, bidding data, statements of dairy executives, and supply characteristics in Ohio during the 1980's. We compare the bidding behavior of a group of firms 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 six and one half percent, or roughly the cost of shipping school milk about 50
Introduction There are many different procurement markets in the world. Public sectors often use the system of auctions in order to ensure competition within these markets. Buyers announce their need of a specific good and the date of auction whereby the supplier with the smallest bid gains the contract. Suppliers need a lot of information beforehand in order to be able to react quickly to their competitors’ bids. The system of auctions however often encourages the formation of illegal cartels and price agreements. In the case at hand 600 schools in the area of Ohio demanded school milk. Possible suppliers were all dairies willing and able to supply school milk. During the 1980s the State of Ohio decided to investigate the biddings for the school milk contracts. Thirteen companies were accused and officially found guilty of uncompetitive behaviour such as price-fixing and the foundation of cartels. Later, several experts, such as Porta, Zona and Pesendorfer, found that the suppliers’ bidding behaviour was indeed rather collusive than competitive. We examine the institutional details of the school milk procurement process, bidding data, statements of dairy executives, and supply characteristics in Ohio during the 1980's. We compare the bidding behavior of a group of firms 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 six and one half percent, or roughly the cost of shipping school milk about 50