Ohio School Milk Case

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The Ohio school milk case

Table of contents

1. Introduction.............................................................................................. 3

2. Market characterization............................................................................. 4 2.1. Definition of a free competitive market................................................ 4 2.2. Definition of a collusive oligopolistic market....................................... 4 2.3. Description of the Ohio school milk market.......................................... 5

3. Key economic issues................................................................................. 5

4. Economic analysis.................................................................................... 6

5. Conclusion................................................................................................ 8

References

List of figures

1. Introduction
Economists generally favor the idea of a free competitive market consisting of a free and fair competition among companies and businesses within a particular market resulting in the production of goods and services of higher quality at cheaper prices. Unfortunately, conditions of perfect competition are hard to find in real life and almost unattainable (Wehmhoerner and Jutten, 2009).

This paper will deal with the so-called “Ohio school milk case” which took place during the 1980s – details of the school milk procurement process, bidding data and demand- and supply side characteristics where examined by Porter and Zona(1999). In their article: “Ohio school milk markets: An analysis of bidding.”, the public procurement market gets introduced. Every year, the school district officials solicit bids on annual supply contracts for milk and other products. The dairies who are able to supply the schools with milk will then submit bids on procurement contracts and the lowest bidder will usually be allowed to supply the school with milk for the following year. Through this constellation collusive agreements are easy to make and are often done by fixing the price. The question arises whether there are sufficient economic reasons that the dairies in the Ohio school milk case work as a collusive market.

This paper will define a free competitive market and a collusive oligopolistic market. It will then seek to describe the Ohio school milk market which is followed by an analysis of the economic key issues. The economic analysis will consider the economic principles underlying free market competition and an analysis of the collusive bidding behavior as a form of price fixing which is subsequently linked with the probability of bidding and winning conditional on distance from plant to school districts in Ohio. Finally it will present a conclusion whether the behavior of some firm operating in school milk markets in Cincinnati, Ohio harmed free and fair competition after examining the economic arguments.

2. Market characterization
2.1. Definition of a free competitive market
In a competitive market structure each dairy is a price taker that cannot raise its price above the market price. It is assumed that there is a perfect knowledge of the market and the barriers to entry and exit the market are low. This ensures lower prices, better quality, more choice and innovation for the customer which increases the living standard and the economic growth of a country and its citizens. A free and fair competition policy supports that producers and customers have the same benefits which then leads to an increased welfare. Welfare is commonly defined as “the well-being of various groups such as consumers and producers” (Perloff, 2009, p.269). Each individual dairy is just one of many other producers who produce the same product, so one firm’s supply of products is just a very small fraction of the total supply. The school milk market is supposed to be in perfect competition as firms are producing homogeneous...
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