AAF020-1 Applied Numeracy for Business AS2 Brief 2025-26

What am I required to do in this assignment?

I. Overview of Your Task

The Kentucky Milk Case

Many products and services are purchased by governments, cities, states, and businesses on the basis of scaled bids, and contracts areawarded to the lowest bidders. This process works extremely well in competitive markets, but it has the potential to increase the cost ofpurchasing if the markets are noncompetitive or if collusive practices are present.

An investigation that began with a statistical analysis of bids in the Florida school milk market led to the recovery of more than$33,000,000 from dairies that had conspired to rig the bids there. The investigation spread quickly to other states, and to date, settlementsand fines from dairies exceed $100.000,000 for school milk bidrigging  in  20 other states. This  case concerns a school milk  bidrigginginvestigation in Kentucky

Each year, the Commonwealth of Kentucky invites bids from dairies to supply half-pint containers of fluid milk products for its schooldistricts. The products include whole white milk, low-fat white milk, and low-fat chocolate milk. In 13 school districts in northern Kentucky,the suppliers (dairies) were accused of “price-fixing”—that is, conspiring to allocate the districts so that the “winner” was predetermined.Because these districts are located in Boone, Campbell, and Kenton counties, the geographic market they represent is designated as the “tri-county” market.

Over a 9-year period, two dairies—Meyer Dairy and Trauth Dairy—were the only bidders on the milk contracts in the school districts inthe tricounty market. Consequently, these two companies were awarded all the milk contracts in the market. (In contrast, a large number ofdifferent dairies won the milk contracts for the school districts in the remainder of the northern Kentucky market—called the “surrounding” market.)

The Commonwealth of Kentucky alleged that Meyer and Trauth conspired to allocate the districts in the tri-county market. To date, one ofthe dairies (Meyer) has  admitted guilt,  while the  other  (Trauth) steadfastly maintains its  innocence. The Commonwealth of Kentuckymaintains a database on all bids received from the dairies competing for the milk contracts. Some of these data have been made availableto  you to analyze to determine whether there is empirical evidence of bid collusion in the tri-county market. The data, saved in theASS02_MILK file, are described in detail below. Some background information on the data and important economic theory regarding bidcollusion is also provided. Use this information to guide your analysis. Prepare a professional document that presents the results of youranalysis and gives your opinion regarding collusion.

Background Information - Collusive Market Environment Certain economic features of a market create an environment in which collusion may be found. These basic features include the following:

1. Few sellers and high concentration: Only a few dairies control all or nearly all of the milk business in the market.
2. Homogeneous products: The products sold are essentially the same from the standpoint of the buyer (i.e., the school district).
3. Inelastic demand: Demand is relatively insensitive to price. (Note: The quantity of milk required by a school district is primarily determined by schoolenrollment, not price.)
4. Similar costs: The dairies bidding for the milk contracts face similar cost conditions. (Note: Approximately 60% of a dairy’s production cost israw milk, which is federally regulated. Meyer and Trauth are dairies of similar size, and both bought their raw milk from the same supplier.)Although these market structure characteristics create an environment that makes collusive behavior easier, they do not necessarily indicate the existence of collusion. An analysis of the actual bid prices may provide additional information about the degree of competition in the market.

Collusive Bidding Patterns

The analyses of patterns in sealed bids reveal much about the level of competition, or lack thereof, among the vendors serving the market.Consider the following bid analyses:

1. Market shares. A market share for a dairy is the number of milk half-pints supplied by the dairy over a given school year, divided by thetotal number of half-pints supplied to the entire market. One sign of potential collusive behavior is stable, nearly equal market shares overtime for the dairies under investigation.
2. Incumbency rates. Market allocation is a common form of collusive behavior in bidrigging conspiracies. Typically, the same dairy controlsthe same school districts year after year. The incumbency rate for a market in a given school year is defined as the percentage of schooldistricts that are won by the same vendor who won the previous year. An incumbency rate that exceeds 70% has been considered a sign ofcollusive behavior.
3. Bid dispersion. In competitive sealed-bid markets, vendors do not share information about their bids. Consequently, more dispersion orvariability among the bids is observed  than in collusive markets, where vendors communicate about their bids and have a tendency tosubmit bids in close proximity to one another in an attempt to make the bidding appear competitive.
4. Comparison of average winning bid prices. Consider two similar markets, one in which bids are possibly rigged and the other in which bidsare competitively determined. In theory, the mean winning price in the “rigged” market will be significantly higher than the mean price inthe competitive market for each year in which collusion occurs.
5. Price versus cost. In competitive markets, bid prices are expected to track costs over time. Thus, if the market is competitive, the bid priceof milk should be highly correlated with the raw milk cost. Lack of such a relationship is another sign of collusion. Similarly, bid price shouldbe correlated to the distance the product must travel from the processing plant to the school (due todelivery costs) in a competitive market.

II. Requirements for Your Report

In this report you are required to include the following:

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