. 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 Ă˘â‚¬ËśĂ˘â‚¬Ëśtri-countyĂ˘â‚¬â„˘Ă˘â‚¬â„˘ market), two suppliersĂ˘â‚¬â€ťMeyer Dairy and Trauth DairyĂ˘â‚¬â€ťwere 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 Ă˘â‚¬ËśĂ˘â‚¬Ëśtri-county marketĂ˘â‚¬â„˘Ă˘â‚¬â„˘ 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 marketĂ˘â‚¬â€ťcalled the Ă˘â‚¬ËśĂ˘â‚¬ËśsurroundingĂ˘â‚¬â„˘Ă˘â‚¬â„˘ 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 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 between 1983 and 1991 are saved in the MILK file
(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 tri-county milk market, the variation in winning bid prices in the surrounding (Ă˘â‚¬ËśĂ˘â‚¬ËścompetitiveĂ˘â‚¬â„˘Ă˘â‚¬â„˘) market will be significantly larger than the corresponding variation in the tri-county (Ă˘â‚¬ËśĂ˘â‚¬ËśriggedĂ˘â‚¬â„˘Ă˘â‚¬â„˘) market. A MINITAB analysis of the whole white milk data in the MILK file yielded the
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printout. Is there evidence that the bid price variance for the surrounding market exceeds the bid price variance for the tri-county market?