Detection of rigged school milk prices. Each year, the state of Kentucky invites bids from dairies to supply half-pint containers of ?uid milk products for its school districts. In several school districts in northern Kentucky (called the ‘‘tri-county'' market), two suppliers- Meyer Dairy and Trauth Dairy- were accused of price-?xing, that is, con- spiring to allocate the districts so that the winning bidder was predetermined and the price per pint was set above the competitive price. These two dairies were the only two bidders on the milk contracts in the ‘‘tri-county market'' between 1983 and 1991. (In contrast, a large number of different dairies won the milk contracts for school districts in the remainder of the northern Kentucky market- called the ‘‘surrounding'' market.) Did Meyer and Trauth conspire to rig their bids in the tri-county market? If so, economic theory states that the mean winning price in the rigged tri- county market will be higher than the mean winning price in the competitive surrounding market. Data on all bids received from the dairies competing for the milk contracts between 1983 and 1991 are saved in the MILK ?le.
(a) A MINITAB printout of the comparison of mean bid prices for whole white milk for the two Kentucky milk markets is shown below. Is there support for the claim that the dairies in the tri-county market participated in collusive practices? Explain in detail.
(b) In competitive sealed bid markets, vendors do not share information about their bids. Consequently, more dispersion or variability among the bids is typically observed than in collusive markets, where vendors communicate about their bids and have a tendency to submit bids in close proximity to one another in an attempt to make the bidding appear competitive. If collusion exists in the tricounty milk market, the variation in winning bid prices in the surrounding (‘‘competitive'') market will be signi?cantly larger than the corresponding variation in the tricounty (‘‘rigged'') market. A MINITAB analysis of the whole white milk data in the MILK ?le yielded the