Review of Industrial Organization 15: 115–134, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
Non-Cooperative Tacit Collusion, Complementary
Bidding and Incumbency Premium
IN K. LEE
Samsung Economic Research Institute, Kukje Building, 191, Hangangro 2-Ka, Yongsan-Ku, Seoul,
Abstract. This article focuses on testing the intuitive idea of Folk Theorem in a repeated game,
and the existence of complementary bidding and incumbency premium. Through careful analysis of
bidding behaviors in the Dallas-Ft. Worth (DFW) school-milk industry, I ﬁnd that cooperation based
on rationality and repetition satisﬁes the conditions for a kind of Folk Theorem. The data also strongly
suggest that all major milk processors are engaged in complementary bidding to allocate consumers
geographically and command statistically signiﬁcant incumbency premia in their incumbent districts.
Even if the equilibrium outcomes are largely non-cooperative, some pieces of circumstantial evidence
uncovered in this school-milk market study may be sufﬁciently convincing to enable dispensing with
evidence of actual communication.
Key words: Non-cooperative tacit collusion, complementary bidding, incumbency premium, an-
JEL Citation Index: C7, L1, L4.
Data from the Texas school-milk bid contain much information on cost factors and
strategic behaviors which is ideal for testing game theoretic prediction.
Statistical results show that under quite general conditions, a kind of Folk The-
orem emerges, which indicates that rationality and repetition support cooperation.
Data also strongly suggest that all major ﬁrms have engaged in complementary
bidding to allocate consumers, and enjoyed a statistically signiﬁcant incumbency
premium in the incumbent districts. This article presents strong evidence of com-
plementary bidding, in which all bidders except one submit high bids in order to
Chief researcher of Samsung Economic Research Institute, Seoul, Korea. This article is partially
excerpted from Chapter 2 of my dissertation. The author is indebted to Dr. David Sibley for his
continual encouragement and guidance throughout this research. I would like to acknowledge with
thanks the constructive comments and suggestions of Dr. Preston McAfee, Dr. Subal Kumbhakar and
two anonymous referees. Any remaining error can only be attributed to the author.