Public Policy in Private Markets Collusion

Announcements HW:  HW 1, graded – can pick up at the end of class  HW 2, due 3/1; HW 3 due 3/6 3/6: first debate – group presenters: video is due to me by 3/2 (this Friday) 3/8: midterm #1 (review sheet posted) – material will be reviewed on 3/1

Collusive Restraints of Trade Practices covered by Section 1:  Direct Agreements To fix price To Allocate markets  Geographically  By type of customer  Other Collusive restraints Gray area (circumstantial evidence) Conscious parallelism, trade associations, non-profit organizations

Industrial Organization Weak Case of Price Fixing: School Milk

Ohio v. Trauth Schools: Bid solicitation for annual supply of milk (sealed bid auction) > 600 school districts Solicitation: menu of milk types, sometimes with other requirements such as napkins, coolers. Local diaries supplied milk  Costs similar across diaries  Distance is the key factor

Market concentration

Ohio v. Trauth  Homogeneous product  Similar technology across processors  Costly transportation (competition is localized)  High barrier to entry (no one builds a plant solely for selling milk to schools)  Inelastic demand  Infrequent demand  Information available (schools posted info)  Easy allocation of markets

Ohio v. Trauth Methods involved bid rotation & complementary bidding: artificially raised the price for schools Case where direct evidence was not enough:  Additional economic (statistical) evidence was needed  Would a “control” group behave the way defendants behaved? Closeness should increase probability of submitting bid Conditional on submitting a bid, bid level should increase with distance  Are bids correlated? (complementary bidding)

Ohio v. Trauth Control group behavior Accused firms behavior

Ohio v. Trauth Accused firms behavior

Ohio v. Trauth Aftermath: Settled out of court in 1996 (even though statistical evidence was strong). Problem: DOJ lost a federal case in 1995 (due to unreliable confessions) Collusion is frequent in school milk auctions 130+ criminal cases filed

Industrial Organization Collusion and Non-Profits: MIT & Ivy League schools case

MIT Financial Aid (DOJ, 1991)  MIT, Brown, Columbia, Princeton, U Penn, Yale, Dartmouth, Cornell, Harvard The controversial activity:  “Overlapping” student athletes (1950’s)  No aid beyond financial needs (agreement)  It then extends to non-athletes  Aid package + family contribution (fixed across schools) Important elements in case:  Do antitrust laws apply to not-for-profit organizations? (what do they maximize?)  Per se vs. rule of reason approach

MIT Financial Aid Example: Family contribution = $10,000 across all schools

MIT Financial Aid Government:  Tuition is commercial activity (section 1 applies) Recall NCAA case re broadcasting of games  Practice aimed at increasing tuition and revenue  Some consumers harmed: wealthy and smart  Per se rule: no room for justifications

MIT Financial Aid MIT:  No trade or commerce (outside of section 1)  Tuition < cost  Court did not have experience with not-for- profit organizations (hence rule of reason)  Not-for-profits maximize something else  Agreements helped the needy (in line with government’s objectives)  No evidence of increased revenue

MIT Financial Aid Statistical analysis  How does tuition in Ivy league schools compare to similar schools?  Regress tuition/student on many variables, including indicator of whether school is Ivy league  Further studies: Look at whether tuition increased after Overlap group practices were eliminated

Merger Law

The Trial 8 Ivy League schools signed consent decrees MIT refused and went to trial Sept ‘92: MIT found guilty of violating Section 1 of Sherman Act (under rule of reason) Court of Appeals upheld the District Court’s ruling but disagreed on several points Case ended in a Settlement in 1993: MIT could participate in overlap practices, but only in general, not on specific students

Statistical analyses in antitrust Bottom line in statistical analyses is to compare behavior of suspect firms:  With control group (Ohio, MIT)  During conspiracy v. outside conspiracy (ADM, MIT)