Detection of rigged school milk prices (cont’d). Refer to the investigation of collusive b...

Detection of rigged school milk prices (cont’d). Refer to the investigation of collusive bidding in the northern Kentucky school milk market, presented. Market allocation is a common form of collusive behavior in bid-rigging conspiracies. Under collusion, the same dairy usually controls the same school districts year after year. The incumbency rate for a market is defined as the proportion of school districts that are won by the vendor that won the previous year. Past experience with milk bids in a competitive environment reveals that a typical incumbency rate is .7. That is, 70% of the school districts are expected to purchase their milk from the dairy that won the previous year. Incumbency rates of .9 or higher are strong indicators of collusive bidding. Over the years, when bid collusion was alleged to have occurred in northern Kentucky, there were 51 potential vendor transitions (i.e., changes in milk supplier from one year to the next in a district) in the tricounty market and 134 potential vendor transitions in the surrounding market. These values represent the sample sizes (n1 = 134 and n2 = 51) for calculating incumbency rates. Examining the data saved in the MILK file, you’ll find that in 50 of the 51 potential vendor transitions for the tricounty market, the winning dairy from the previous year won the bid the next year; similarly, you’ll find that in 91 of the 134 potential vendor transitions for the surrounding area, the same dairy won the bid the next year.

a. Estimate the incumbency rates for the tricounty and surrounding milk markets.

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b. A MINITAB printout comparing the two incumbency rates is shown below. Give a practical interpretation of the results. Do they show further support for the bid collusion theory?

Detection of rigged school milk prices. Each year, the state of Kentucky invites bids from dairies to supply half-pint containers of fluid milk products for its school districts. In several school districts in northern Kentucky (called the “tricounty” market), two suppliers—Meyer Dairy and Trauth Dairy—were accused of price-fixing—that is, conspiring 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 tricounty market for eight consecutive years. (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 tricounty market? Economic theory states that, if so, the mean winning price in the rigged tricounty 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 during the time period in question are saved in the MILK file. A MINITAB printout of the comparison of mean prices bid for whole white milk for the two Kentucky milk markets is shown below. Is there support for the claim that the dairies in the tricounty market participated in collusive practices? Explain in detail.