Just a couple of weeks ago, the chicken industry was charged with price fixing. According to the charges, executives were texting each other to coordinate prices in chicken auctions. (source) Tyson Foods has admitted to being a part of this scheme and says that it is cooperating with the DOJ. Time will tell what the penalty will be for this illegal behavior. (source)
As it turns out, chickens aren’t the only food industry where people have been caught price-fixing. Milk is another industry that has been fraught with collusion. Yes, those cardboard milk cartons you drank from in Kindergarten were probably over-priced… In the 1980s and 1990s, milk farmers were colluding on supplying milk to public schools in states across the country (source).
First, let’s back up and talk about why collusion may be bad. And for whom.
Let’s take two firms producing the same good: milk. If you are buying milk and perceive both firms to have the same quality of milk, which one will you buy from? The cheaper one, of course! Firms, therefore, have an incentive to keep prices low. Now, prices won’t go too low. If prices go below the point where firms cannot make an economic profit (in other words: where they could do better in another market), then firms will not supply milk.
Who benefits from lower prices? Well, the consumers of course! If instead of paying $5 for a gallon of milk, you only have to pay $4, you will get an extra “surplus” of $1 for each gallon you buy. Additionally, you might buy more milk, or people who were not buying milk may jump in and join the market. Overall, consumers are better off with lower prices – more purchased at lower prices.
Now, what happens if firms start colluding? Rather than being incentivized to keep prices low, firms can charge higher prices without concern that other firms will beat their price. Consumers are hurt.
The first anti-trust law, the Sherman Act, was passed in 1890 to attempt to keep competition between firms for the benefit of consumers. (source) Since then, it has been illegal for firms to work together (collude) in setting prices or quantities. In other words, cartels (firms that come together to act like monopolies) are not allowed by law.
Why school milk specifically?
School districts (or counties in some case) hold auctions to determine which companies will supply milk for the upcoming school year. Firms can bid in the auction for the milk contract. The lowest bid (whoever offers the lowest prices) gets the contract.
There are a few specific reasons why school milk works well for collusion. (These are spelled out in this paper by Pesendorfer (paper).
1) Milk is fairly homogenous. Milk from one cow is very similar to milk from another cow. Cartons of milk from one company are also very similar to the same sized cartons from another company.
2) The market is concentrated among just a few firms which makes coordination between firms easier.
3) There are many school districts and counties that are separately buying milk. This allowed the firms who were colluding on contracts to split up the number of contracts each firm gets.
4) School districts act independently. They do not know the prices other districts pay and each district has their own auction. This separation made it hard to detect collusion.
5) If a firm in the cartel deviated (agreed to set one price but then lowers their price to capture the market), other firms could easily and quickly retaliate on new contracts because the auctions were occurring over a few month period.
6) Demand for school milk is relatively inelastic. The number of people in schools were not changing by much each year. Plus, much of the milk purchased was subsidized by the Department of Agriculture for those in school free lunch programs.
Dairy firms in different states had different ways they colluded on school milk.
In Ohio, milk farmers agreed that the incumbent, or the firm that was already supplying milk to the school, would get the lowest price. So, firms would submit bids in an auction for school milk. The lowest price bid wins; however, it was pre-determined that the incumbent firm would have the lowest price. All other firms would submit higher bids. Therefore, the winning firm had no incentive to keep prices low. (source)
Texas acted similar to Ohio except that the incumbent did not always win. The firms just split up who got each contract. If a firm was designated to get a contract, they would put in a bid and the other firms would put in higher bids, ensuring that the pre-determined firm won.
In Florida, firms acted similarly with respect to who received contracts. However, in this case, they made side-payments with each other to compensate if some firms got more or better contracts. That way the firms could split up the profits.
According to the Department of Justice in May of 1994, the DOJ had brought cases in 18 states: Kentucky, Florida, Georgia, North Carolina, South Carolina, Virginia, Illinois, Texas, Mississippi, Tennessee, Indiana, Oklahoma, Alabama, Michigan, New York, Connecticut, Louisiana and Ohio. (source)
So, what are the consequences of the milk collusion?
Fines and prison time.
As of May 1994, “To date, 61 corporations and 56 individuals have been convicted and approximately $62.4 million in fines and civil penalties have been imposed in cases involving the supply of dairy products to public school districts. Twenty-six individuals have been sentenced to serve terms of imprisonment in cases involving the supply of dairy products to public school districts.” (source)
Other ways to Collude
There are actually multiple ways that firms can collude, beyond just fixing pricing. And, indeed, it seems that the milk market has seen multiple variations of collusion over the past 40 years.
An alternative way to communicate is through suppliers. In the UK, large grocery stores have paid settlements after evidence of price collusion for milk was found. In this case, it was the grocery stores who were colluding. They communicated the prices they were going to pay through the supplier (source1, source2, source3).
Other than prices, firms can affect quantity. If there are fewer competitors in the market, then the price can remain artificially high. This was happening in the milk industry just a few years ago. Big farms were paying other farms to kill their cows and sell them for their beef rather than their milk. Rather than going to bringing this to court and risk jail, these firms settled out of court. (source) I talk about this type of collusion more in the maple syrup post.
Moral of the story: collusion hurts consumers and is illegal in the U.S.
*** Fun Dairy Fact ***
In honor of June being National Dairy Month, Ronnybrook Farms put out some dairy facts on their Instagram account. Here is my favorite:
“The world’s population consumes over 2.1 billion liters [of milk] every day. That’s enough to fill up 813 Olympic-sized swimming pool[s].”
Tres Leches Cake from Smitten Kitchen
Tres Leches (Three Milks in Spanish) is a Mexican dish with, you guessed it, three types of milk in it: whole cream, sweetened condensed milk, and evaporated milk. I used the recipe from Smitten Kitchen, surprise surprise, but I would add one important tip. Make sure you reserve some of the three-milk mixture you soak the cake in (reserve 1/2 cup to ¾ cup). When going to serve, put a spoonful of the milks on the plate AND on top of the cake. This will help guarantee that you cake is deliciously moist when you take your fork to it.
230 grams (1 3/4 cup) all-purpose flour
30 grams (1/4 cup) cornstarch
1/2 tsp. salt
2 tsp. baking powder
6 large eggs (whites and yolks separated)
2 tsp. vanilla bean paste (or vanilla extract)
250 grams (1 1/4 cup) sugar
1/4 cup milk
1 can (12-oz) evaporated milk
1 can (14-oz) sweetened condensed milk
1 1/2 cup heavy cream