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Public Policy in Private Markets

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)

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Public Policy in Private Markets

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  1. Public Policy in Private Markets Collusion

  2. 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

  3. 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

  4. Industrial Organization Weak Case of Price Fixing: School Milk

  5. 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

  6. Market concentration

  7. 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

  8. 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)

  9. Ohio v. Trauth Control group behavior Accused firms behavior

  10. Ohio v. Trauth Accused firms behavior

  11. 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

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

  13. 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

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

  15. 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

  16. 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

  17. 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

  18. Merger Law

  19. 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

  20. 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)

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