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Collusion in the Milk Market + Tres Leches Cake

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.