Merger Guidelines - Proposed Merger between Coca Cola and the Dr Pepper of 1986 - Case Study Example

Merger guidelines: The proposed Merger between Coca cola and the Dr Pepper of 1986 Introduction Merger guidelines highlight critical analytical practices, techniques and policies relating to mergers and acquisitions between actual and potential competitors. The ultimate goal of merging competing enterprises is to lessen competition or create a monopoly. Mergers help to create efficiency in running the economy. Firms can create potential for economies of scale, a broader scope and diversification of risks associated with unhealthy competition. Reduced competition in turn increases the company’s market share. However, relevant legislations have to be complied with before a merger can be made between any rival business enterprises. Merger law depends on the country in which the entities operate (Clarke 10). It was on 20 February 1986 when the Coca-Cola Company declared its intentions to purchase the Dr Pepper Company to merge the operation of the two companies. The declaration came shortly after the Pepsi Company had announced its plans to acquire the Seven-Up Company, a subsidiary of the Philip Morris Corporation Limited. The Coca-Cola Company ranked first, Pepsi Company second, the Seven-Up Company third and the Dr Pepper Company the fourth largest producers of carbonated soft drinks in the United States. The Federal Trade Commission in an antitrust case against the merger opposed the decisions of these two companies. The corporation believed that the two mergers would be uncompetitive. It was then that the Pepsi Company dropped its intentions while Coca-Cola Company persisted in the case. Using the Clayton Act Section 7, the United States Department of Justice and the Federal Trade Commission prevent mergers, which in their opinion tend to lessen competition or create a monopoly (Jacobson 482). Under the horizontal structure of business integration, a company acquires production units for standard outputs. These outputs though alike may have differences in qualities, complexities and price points. Horizontal integration is preferred because of its ability to create a strengthened presence in the reference market and engage in monopoly pricing. However, this is injurious to the society, in general. In merger analysis, economists and legislators work together to analyze the anti-competitive effects of proposed of mergers. Economic and legal expertise in merger assessment is complementary aspects. Economic knowledge is necessary for empirical analysis. In application, economics provides a conceptual framework essential for analysis of the functioning of markets. Competition agencies that undertake to complement the legal assessment of mergers rely on the extensive qualitative and quantitative economic concepts. Theoretical and empirical economic treatment helps to focus on price effects of mergers (Cseres 15). The guidelines Evidence of adverse competitive effects by the agencies Any reasonably reliable information that is available is considered to address the question whether a merger may substantially lessen competition (Clarke 19). Available evidence in this regard is sought and evaluated for its reliability. It is the responsibility of agencies to consider both the proof that a merger may enhance competition and the evidence that it may lessen it. The actual effects observable in a consummated merger can reveal whether any effects are likely to arise in the future. The likelihood that post-merger price increases and other adverse changes may occur is given a lot of weight. Evidence can also draw from direct comparisons based on experience. Natural experiments and historical events that seem informative on the competitive effects of a merger are relied on for evidence. Variations on similar markets also make a considerable contribution here. Agencies can also rely on the market shares and concentration to adduce evidence. Where the level of concentration and market share is presumed to increase, the merger is most likely to enhance market power (Cseres 11). Information on merger analysis is obtained from various sources. The sources of reliable evidence include the merging parties, other industry participants, the customers and the industry observers. The merging parties provide substantial information in the form of testimony, documents or data consisting of descriptions of competitively relevant conditions. The regular course records are more probative and reliable. The agencies can obtain information about customers’ purchasing behavior and choices from the customers themselves. Here, the customers express their views about the effects of the merger. More helpful information about a merger inquiry can be sought from the suppliers, distributors and industry analysts (Jacobson 483). Target customers and price discrimination Agencies are interested in knowing whether the competitive effects vary significantly for different customers purchasing similar commodities. Where sellers can discriminate, such differential impacts can arise. Price discrimination imposes competitive effects on the targeted customers even if such effects do not affect other clients. The principles of limited arbitrage and differential pricing must be met for price discrimination to be viable. The suppliers should be able to price differently to the targeted customers than to others. By arbitrage, target customers should not defeat the price increase (Cseres 14). Market definitions For a horizontal merger, when a potential competitive concern is identifiable, market definition plays two key roles. It helps specify the line of business and the part of the country in which it arises. Agencies identify the relevant market in which the merger may lower competition. Through market definition, the agencies establish market participants and analyze the market share and concentration. The establishment illuminates the merger’s likelihood of competitive effects. Market definition solely aims at demand substitution factors. Here, certain principles are applied to product market definition and the geographical market definition (Clarke 22). Under the product market definition, agencies concern themselves in establishing the relationship between the products sold by two merging firms (Cseres 17). The goal here is to analyze competition between the two products. Geography may limit some customers’ willingness and ability to substitute products. It may also affect the ability and willingness of suppliers to serve customers in particular locations. Agencies, therefore, apply principles of geographic market definition to establish a relevant market with a geographic dimension. Transportation costs often influence the scope of geographic markets. Geographic market definition is broadly analyzed in terms of the location of customers and that of suppliers. Market shares, participants, and concentration In order to evaluate competitive effects, measures of market concentration and market share are critically analyzed by the agencies. A firm’s competitive incentives can be influenced directly by market share. It is important to calculate the market shares of various companies that produce products in an identified relevant market. The accuracy of such calculations depends on the availability of reliable data based on historical evidence. Market share is calculated to test whether a firm has understated or overstated its future competitive significance. Market participants refer to all the firms that derive revenues from the relevant market. Firms that anticipate entering the relevant market in the future are also included. Further, those companies that are not currently producing for the relevant market but likely to increase supply with direct competitive impact maintaining costs also count. These are termed as rapid entrants and form part of the relevant market. Market concentration is an important tool for evaluating merger competitive effects. The level of concentration before and after the merger is considered. More weight is given to market concentration when the market shares remain stable over time. The implication is that firms that maintain their market share amid historical changes are considered less affected by the competitive effects (Jacobson 487). Unilateral and Coordinated Effects In industries where products are close substitutes, competition between the products can be relatively high (Clarke 26). Distant substitute products compete less vigorously. In the case of a merger where firms sell differentiated products, competition diminishes enabling the merger to raise the price of products than before resulting in high profits. In industries involving intermediate goods and services, bargains and auctions set the terms of trade. In the process, buyers can negotiate with many sellers. A merger between firms that competed before prevents customers from playing the dealers against each other. The result is again for the amalgamation, in this case. Competitive analysis of alternative output suppression modes differ. Unilateral output suppression can be profitable. Where the market share of the merged firms is high, the output of the merged firms already committed for sale is low. The supply responses of competitors are low, and the market elasticity of demand is relatively low. Competition necessitates the need for firms to innovate. Agencies consider if there is likelihood that a merger will likely diminish innovation competition. A coordinated interaction involves explicit negotiations for a common understanding on how firms compete or refrain from fighting. The negotiations are a violation of the antitrust laws. The ability of rival firms to engage in coordinated interactions will depend on the predictability and strength of the other firm’s response to price changes. The impact of a merger on the interactions of the market participants should be analyzed (Clarke 27). The economic context Economic evidence in merger analysis prevents those mergers that can harm competition significantly. Economics provides a conceptual framework and instruments that help distinguish between mergers that are unlikely to impose competitive effects from those that may. Where further analysis is required, economic evidence can inform predictions about the likelihood of competitive effects of a merger. These forecasts are relevant in establishing whether the necessary legal test has been met and if agency intervention is essential. Economic analysis can be either qualitative or quantitative. Economics is important in understanding how the market works, drafting credible theories of harm and applying the relevant economic evidence to the theory to better analyze the impact of merging. In merger review, the understanding of how the market works and the applicable market structures in various cases is necessary (Cseres 23). A range of tools necessary for empirical analysis of the effects of mergers is provided in economics. These tools include simple price comparisons, merger simulation models and correlation analysis. The study of entry-exit events and prior acquisitions is quite useful. Mitigating factors should be considered where anti-competitive effects are anticipated. A number of questions can be asked when conducting market research on mergers. These would include: what products are a proper substitute for the merging companies’ product?; In what levels of the supply chain are they involved, what are the barriers to expansion and entry, what are the selling strategies, and what is the nature of the companies’ customers? (Jacobson 490). Application of the merger guidelines on the proposed merger between the Coca-Cola Company and the Dr Pepper Company The merger guidelines were used in arriving at the verdict of the case between the Coca-Cola Company and the Federal Trade Commission on July 31, 1986. In this case, the Federal Trade Commission, which was the plaintiff, adduced evidence on a number of economic arguments against the proposed merger. The arguments advanced were greatly structured by the merger guidelines of the Department of Justice. Applied in this trial were the market definition paradigm, a quantitative focus on the market share, a discussion on other market conditions and entry requirements analysis among the Carbonated Soft Drinks producers (Clarke 31). The Federal Trade Commission used four propositions in its economic case against the merger (Jacobson, 493). Firstly, it argued that the relevant product markets were carbonated soft drinks concentrate. It was further submitted that the relevant geographic markets were a national market and local markets that could be approximated by metropolitan areas. Secondly, the plaintiff demonstrated that the markets were highly concentrated. Therefore, the proposed merger would increase the levels of concentration substantially. Thirdly, the plaintiff suggested that entry by new or small existing producers would thwart efforts at exercising market power. It would be time-consuming, difficult and risky. Lastly, it was established that the merger would most likely reduce competition substantially. Considering the crucial propositions and supporting arguments presented by both the plaintiff and defendant, Judge Gerhard Gesell gave his verdict in the favor of the Federal Trade Commission. The arguments of the applicant were confirmed true and hence the merger was forbidden (Clarke 74). Works Cited Clarke, Julie. International Merger Policy. Cheltenham, UK: Edward Elgar Publishing, 2014. Print. Cseres, Katalin J. Competition Law and Consumer Protection. The Hague: Kluwer Law International, 2009. Print. Jacobson, Jonathan M. Antitrust Law Developments (Sixth). Chicago, Ill.: Section of Antitrust Law, ABA, 2008. Print. Read More