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Making Business Decisions:The Kentucky Milk Case(To accompany Chapters 1 and 2) There are many things that could be included in a report about the possibility of collusion. I have concentrated onthe incumbency rates, bid levels and dispersion, and average winning bids. With the data available, no comparisonof market share can be made since there was so much missing data. Actually, with the data available, the exactanalysis cannot be made, since only the winning bid information is provided. Thus, we have no idea what the losingbids were. I will present what I think is a reasonable solution. This is by no means the only solution to the case.Many other presentations could also be used.Incumbency RatesThe incumbency rate is the percent of the school districts that are won by the same vendor who won the previousyear. A table containing the incumbency rates is included as well as a plot. Notice in the plot that the incumbencyrates in the Tri-county market is higher than that in the Surrounding market. From 1985 through 1988, theincumbency rate for the Tri-county market was never lower than .923, while in the same period in the Surroundingmarket, the incumbency rate was never higher than .730. This implies the possibility of collusion in the Tri-countymarket. Year19841985198619871988198919901991 Surrounding MarketNumber ofSameIncumbencyDistrictsVendorsRate2616.6152719.7043219.5943727.7303725.6763723.6223424.70653.600 Tri-county MarketNumber ofSameIncumbencyDistrictsVendorsRate108.80012121.00013131.0001312.92313131.000139.6921310.7691311.846 90Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall. Making Business Decisions: The Kentucky Milk Case 91 The plot of the incumbency rates is: Bid Levels and DispersionSince we only have access to the winning bids in each of the school districts, we cannot make a true analysis of thebid levels and dispersions. As a compromise, I have used the winning bids of the two dairies in question—Trauthand Meyer. I have looked at only the winning bids of these two dairies in both the Tri-county market and in theSurrounding market. If there was no collusion, then the winning bids and the dispersions of the winning bids shouldbe similar in the two markets for the two dairies. I looked at the box plots of the winning bids of the two dairies ineach market for each type of milk: whole white, lowfat white and lowfat chocolate. I have included only a few ofthe box plots as illustrations. Those included are for 1985 and 1986. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall. 92 Making Business Decisions: The Kentucky Milk Case 1985 Winning Bids: OBS MARKET WINNER WHOLEWHITE LOWFATWHITE LOWFATCHOCOLATE 1234567891011121314151617181920 SURSURSURSURSURSURSURTRITRITRITRITRITRITRITRITRITRITRITRITRI MEYERTRAUTHTRAUTHTRAUTHMEYERTRAUTHMEYERTRAUTHTRAUTHMEYERTRAUTHMEYERMEYERMEYERTRAUTHTRAUTHMEYERTRAUTHMEYERTRAUTH 0.12800.1200..0.12250.12300.12500.14400.14500.14100.13930.13400.1445.0.1449.0.14800.1310.0.1435 0.12500.11100.10790.11900.11300.11300.11450.14400.13500.14100.13930.13400.13450.13450.13490.12990.14800.12900.13800.1335 0.13150.10900.10790.12100.10990.11200.1140..0.1410.0.13400.1395.0.13990.12990.1480… Box Plots for Whole White Milk—1985Boxplots for Whole White Milk – 19850.1500.145 WWBID 0.1400.1350.1300.1250.120S U RRO U N D TRI-C O U NTYM A RKET Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall. Making Business Decisions: The Kentucky Milk Case 93 Box Plots for Lowfat White Milk—1985Boxplots for Lowfat White Milk – 19850.15 L FWBID 0.14 0.13 0.12 0.11S U RRO U N D TRI-C O U N TYM A RKET Box Plots for Lowfat Chocolate Milk—1985Boxplots for Lowfat Chocolate Milk – 19850.15 LFCBID 0.14 0.13 0.12 0.11S U RRO U N D TRI-C O U N TYM A RKET Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall. 94 Making Business Decisions: The Kentucky Milk Case For each type of milk, the mean and median winning bids for the Tri-county market were higher than thecorresponding winning bids in the Surrounding market. Also, the dispersion, indicated by the width of the boxesand the length of the whiskers, for the Surrounding market is larger than for the Tri-county market in most cases.This is indicative of collusion in the Tri-county market. This same pattern also existed in 1986.1986 Winning Bids: OBS MARKET WINNER WHOLEWHITE LOWFATWHITE LOWFATCHOCOLATE 123456789101112131415161718192021 SURSURSURSURSURSURSURSURTRITRITRITRITRITRITRITRITRITRITRITRITRI TRAUTHTRAUTHTRAUTHMEYERTRAUTHTRAUTHTRAUTHTRAUTHTRAUTHTRAUTHMEYERTRAUTHMEYERMEYERMEYERTRAUTHTRAUTHMEYERTRAUTHMEYERTRAUTH 0.11950.13300.11400.13500.1224..0.12500.14750.14690.14400.14200.13900.1470.0.1474.0.15050.1360.0.1460 0.11000.12400.10700.12500.11240.11100.11800.11250.14750.13690.13400.14200.13900.13700.13800.13740.13490.15050.13200.14300.1360 0.10850.12900.10500.13150.11100.11100.12000.1115..0.1395.0.13900.1420.0.14240.13490.1505… Box Plots for Whole White Milk—1986Boxplots for Whole White Milk – 19860.15 WWBID 0.14 0.13 0.12 0.11S U RRO U N D TRI-C O U N TYM A RKET Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall. Making Business Decisions: The Kentucky Milk Case 95 Box Plots for Lowfat White Milk—1986Boxplots for Lowfat White Milk – 19860.15 L FWBID 0.14 0.13 0.12 0.11 S U RRO U N D TRI-C O U N TYM A RKET Box Plots for Lowfat Chocolate Milk—1986Boxplots for Lowfat Chocolate Milk – 19860.15 LFCBID 0.14 0.13 0.12 0.11 0.10S U RRO U N D TRI-C O U N TYM A RKET Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall. 96 Making Business Decisions: The Kentucky Milk Case The same pattern that existed for 1985 and 1986 also existed in 1984, 1987, and 1988. From 1989 on, the patternno longer existed. Thus, from the plots, it appears that the two dairies were working together from 1984 through1988 in the Tri-county market.I also plotted the mean winning bids for the two dairies in each of the two markets from 1984 through 1991 for eachtype of milk. In all three plots, the mean winning bid in 1983 was almost the same in the two markets. Then, in1984, the mean winning bid in the Tri-county market was higher than in the Surrounding market for all three typesof milk. This trend holds basically through 1988 (the lowfat white milk mean winning bid for the Surroundingmarket was greater than the mean winning bid in the Tri-county market in 1988). After 1988, the mean winningbids in the two markets are almost the same. This points to collusion in the Tri-county market from 1984 through1988. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall. Making Business Decisions: The Kentucky Milk Case 97 The dispersion, measured using the standard deviation, of the winning bids for each of the three types of milk wasbasically smaller in the Tri-county market than in the Surrounding market for the years 1985 through 1988. Again,after 1988 this pattern no longer existed. Again, this points to collusion between the two dairies in the Tri-countymarket during the years 1984 through 1988. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall. 98 Making Business Decisions: The Kentucky Milk Case Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall.