BEHAVIOR OF DEFENDANTS
Comparison to Control Group Behavior
We now examine the bidding practices of the three dairies located in Cincinnati—
Meyer, Coors, and Trauth—and compare them with the control
group. We consider both the bid submission decision and the level of the bid
contingent on submission.
Porter and Zona (1999) tested for differences between the estimated
control group bid submission model and that estimated for each of the
Cincinnati dairies. For each dairy, we reject the hypotheses that the defendants
submitted bids according to the control group model at conventional
significance levels under all the specifications considered. There are also
significant differences in the statistical process generating the level of bids.
That is, the bidding behavior of each of the Cincinnati dairies differs from
the control group. Behavioral differences are not necessarily the result of
anticompetitive behavior. We are interested in how the behavior of each of
the defendants differs from the control group, given that they differ.
Comparison to a Collusive Strategy
We are faced with a standard problem in antitrust economics: distinguishing
between competitive and collusive behavior.12 Porter and Zona (1993)
identified collusion in highway construction auctions by (1) focusing on bid
levels rather than submission decisions, because conspirators apparently
submitted complementary bids; (2) identifying differences in the determinants
of cartel bids relative to that of other firms; and (3) observing that cartel
bids seemed not to be cost based, except for the lowest cartel bid, in contrast
to the bids submitted by other firms. Because these differences exist,
we conclude that conspiracy with complementary bidding is more likely
In a study of a nineteenth-century railway cartel, Porter (1983) proposed
statistical tests to identify whether competition or collusion is more
consistent with observed data based on pricing patterns over time. Some
observed price fluctuations do not appear to be the result of demand shifts
or changes in observable cost factors. Instead, the observed pattern of occasional
price wars, following periods of unusually turbulent market
shares, is unlikely to be observed under competition. Under a specific theory
of conspiracy, such a pattern is possible. The existence of such a pattern
informs an inference of collusion.
Our strategy for the problem at hand is similar. The nondefendant
firms behave, on average, in a manner consistent with competition. We have
concluded that the Cincinnati dairies behave in a statistically significantly
different manner relative to the nondefendant firms. Is it likely that these
differences are attributable to idiosyncratic effects of cost or competition?
If not, are the differences attributable to independent factors, or are there
suspicious patterns of correlation? We now address these two questions.
There are many alternative methods of colluding in auction markets.13
For example, conspirators could refrain from bidding against each other byallocating exclusive territories. Alternatively, they could submit several
bids at inflated levels, where the number of bids may be intended to create
the appearance of competition. In either event, the members of the ring
know that competition has been limited in the affected markets. Any of
these firms know that if they submit a bid they do not have to worry about
being undercut by another ring member. Observed bids will differ from
competitive bidding because the conspirators have coordinated their actions.
The expected winning bid will be higher because conspirators have
coordinated their actions, whether or not a conspirator wins the auction.
Since distance is an important factor in the control group model, we
focus on that dimension. Moderate increases in shipping distance are associated
with large declines in the probability of submitting a bid (Figure 8-
2). Similar increases in distance are associated with increases in submitted
bids in the control group (about 10 percent at seventy miles in Figure 8-3).
We examine the deviations of defendant firms’ bidding behavior from the
control group predictions in this context.
Consider first the differences between predicted and actual bid submission
behavior for each of the three Cincinnati dairies, at various distances.
There are some notable patterns. First, all three dairies bid more frequently
than the control group model predicts for districts within 30 miles
of their plant. Second, Meyer is unusually likely to bid in districts 100 to
110 miles away, and Trauth in districts 60 to 80 miles away.
We also compare actual bids14 to the control group prediction. The
bids of Meyer and Trauth decrease relative to the control group prediction
significantly with distance. In particular, their bids are significantly lower in
the distance ranges where they were unusually likely to bid—Meyer at 100
to 110 miles, and Trauth at 60 to 80 miles. As further evidence, consider bid
level regressions, comparable to the control group regressions, for the three
Cincinnati dairies. For both Meyer and Trauth, which submitted distant
bids, bid levels are a significantly decreasing function of distance. In contrast,
the distance bids are significantly higher for the control group.
To focus on whether firms behave in a parallel fashion, we tested for
statistical independence in the probability of bidding for the defendant
firms using a standard pairwise procedure. Under the null hypothesis of independent
action based on public information and the specifications of our
bid submission model, knowledge of whether one particular firm bids
should not help predict whether another firm also bids. Under an alternative
hypothesis of either complementary bidding or territorial allocation, the
submission decisions are interrelated, and knowing how one cartel member
behaves helps predict what the other does. In the case of complementary
bidding, if one cartel member bids, then other ring members also bid. In this
case the unexplained portion of the competitive bidding equation is positively correlated across cartel firms. In the case of territorial allocation, if a
particular cartel member bids, then other cartel members will tend not to
bid. Then the unexplained portion of the competitive bidding equation is
negatively correlated across cartel members. The test for independence, or
zero correlation, that we used has power against both alternatives. The results
indicate that the unexplained portion of the Coors submission decision
was positively correlated with the unexplained portion of the Meyer decision,
and similarly for Coors and Trauth, and for Meyer and Trauth. All
three correlations are significant at any standard level.
We perform a similar analysis for the level of the submitted bids. Under
the null hypothesis of independent action based on public information and
the maintained specification of the bid level equations, knowledge of what
one particular firm bid does not help predict what another firm will bid.
Under an alternative hypothesis of complementary bidding, knowing that
one cartel member bid above the predicted level helps predict whether other
cartel firms will bid above that level. If one cartel member bids high, then
other ring members are also likely to bid high. The pairwise correlation coefficients
are positive and significant for all three pairs.
Our results support the testimony by representatives of Meyer and
Coors. The behavior of Coors, Meyer, and Trauth is consistent with a complementary
bidding scheme in the area close to their plants, since more bids
than expected are submitted at distances of less than thirty miles. Further,
these bids tend to be relatively high. The correlation results for these three
firms are also consistent with a complementary bidding scheme. There are
statistically significant correlations in bid submissions by these firms, suggesting
that if one of these firms bids, then the others also tend to bid (to a
greater extent than their proximity, size, and other factors would predict). In
addition, when these firms bid on the same districts in the same years, their
bids tend to move together to a greater extent than their proximity, size, and
other factors would predict.
It is difficult to craft a competitive story where bid levels decrease with
distance, as they do for these firms. The behavior of the Cincinnati dairies
is suspicious, even without a comparison with the behavior of nondefendant
firms. We believe that the collective behavior of these three firms is
best characterized as collusive.