Impact upon the Merger Case between BRITIVIC and AG Barr - Essay Example

Introduction Regulation of market competition is an issue that has gained popularity in the current business sector as dominance of various companies becomes an issue of concern, not only for the rival companies, but also for the consumers. In the UK, the Office of Fair Trade is a regulatory body whose role is to ensure that market players remain fair and that they compete with the same abilities. Besides inter-rivalry fairness, this office is concerned with the protection of the consumers within the market, to avoid over-exploitation by over dominant companies. The UK Drinks market has been marred with specific competition issues that have attracted the attention of the Office of Fair Trade. The main aim of this article is to analyze the case of merger of Britvic as a strategy to compete with Coca Cola and the various issues that arose post-merger. In the UK, carbonated soft drink market can be identified as tight oligopolistic market structure according to Shepherd’s classification of markets but majority dominated by Coca Cola with a 57% market (figure 1; Mintel Oxygen 2014; Shepherd & Shepherd, 2004). Britvic is one of Coca Cola’s rival in position of the second biggest but only with 14% market share (Mintel Oxygen 2014). Faced with much stronger market position of Coke Cola Company, in 2013, Britvic announced the intention to merge with AG Barr, which has third biggest market share by 4%, as one way of acquiring enough strength to compete with the Soft Drinks Giant. In response, the Office of Fair Trade announced the need to make a thorough competition analysis for the two companies to identify the possible impacts of the merger in the market (Spivack, 2010). The merger between is a typical horizontals merger as both companies produce the homogenous product. According to Britvic, a merger will help the company to gain enough ground to compete with Coca Cola which would reduce their dominance because horizontal integration in the industry would have significant impact upon changing of the market structure (Lipczynski et al, 2005; Treanor, 2013). If the monopoly effect in the industry can be declined due to two small market share equipped companies combined compete against the dominate company, the consumers will have a higher bargaining power and may have the opportunity of purchasing soft drinks at a cheaper price. However, the Office of Fair Trade identifies that the merger will result to the formation of two giants, which will reduce completion and the risk of hiked prices after the merger. Figure 1--SHARES OF LEADING BRANDS IN THE UK TAKE-HOME CARBONATED SOFTDRINKS MARKET, BY VALUE, 2013 (Adopt from Mintel Oxygen, 2014) Consumer welfare is major variable should be concern as market structure changed in post-merger. When market rivalry increases, the consumer bargaining power increase as they have a big opportunity to benefit from reduced prices (Lipczynski et al, 2005). The dominance of the Coca Cola Company in the market has given it the power to raise prices significantly which would deeply harm the consumer welfare as they have the largest market share and low price elasticity of soft drink’s demand (Martin, 2008). Rival companies such as Britvic could use merger as tool to increase potential to compete with the company thereby to some extent benefit customer welfare due to intensive competition. However, According to the Cournot model, consumer welfare would worse off when oligopoly market changed to duopoly market in post-merger as product price under duopoly equilibrium production quantity would even higher than that under oligopoly’s (Martin, 2008). The Office of Fair Trade has the mandate to protect both the consumers as well as market players from competition to ensure that there is fair trade (OTF 2013). OFT was established to conduct business control until its closure in 2014. For fair market competition, it may appear important to allow the merger to give the companies the power to compete with the soft drinks giant, which would considerably reduce their price control and hence streamline the consumer welfare (Shapiro, 2012). The criticism of business regulation is common today due to the limitation that the government puts to investors as they seek strategies to win in the tough market. This is in the same line with the viewpoint held by Austrian school where they oppose government intervention of the market process (Lipczynski et al, 2005). However, the government has development regulations that limit the investor’s decision making process and control their business path. While this is an essential tool to protect other stakeholders such as consumers within the market, there is evidence that such regulations kill innovation that would help facilitate fair business competition (Spivack, 2010). Besides, the government may appear biased for protecting certain dominant companies such as Coca Cola, who have become market controllers and have constrained other investors. This also antagonizes some people who held neoclassic economics viewpoint that oppose monopoly within the industry and used support government intervention (Lipczynski et al, 2005). From this perspective, harmonizing the role of the government has become crucial for many investors, to protect the consumers at the expense of organizations that are in the verge of collapsing. From this perspective, harmonizing the government forces within the business market would pave way for fair competition as organization model creative business designs to increase their competitive advantage. Article 1: Britvic Condemns Investigation into Planned Merger As soon as the OFT sent out to investigate the competition impacts of the merger between Britvic and AG Barr, the Chairman of Britvic raised complains on this move of the OFT. According to the Chairman of Britvic, the move of the company would help to conquer the market and reduce the dominance of most effective companies (Treanor, 2013). However, from one perspective, it is possible that the merger will allow the company to combine resources and hence get a better control of the market. The company would have enough market order and production capacity to produce in an economy of scale thereby compete with the dominant company. From such a move, it would be possible to reduce monopolistic competition, which has affected the soft drinks market in the past. From this angle, it would be beneficial for the OFT to allow the merger to foster fair competition. From an angle of protecting consumer welfare, OFT has the right to oversee the market and to determine the possible impact of every business move. Although investors’ liberalization is crucial in encouraging creativity, there is evidence that mergers between the two companies will eliminate rivalry and hence promote price control by the organizations. In short, the merger will lead to the creation of two market giants who can control prices. According to Bork (1978), regulatory bodies should protect the competition rather than the competitor as economic efficiency is essential for protecting the consumer welfare. Mergers which perhaps strengthen monopolies should be prohibited as it would harm consumer welfare (Bork, 1978). Companies such as Coca Cola that have operated effectively within the market are protected by regulations to ensure that they remain at this position. Also, it remains crucial for the regulating bodies to foster fair trade to encourage fair competition and to protect young companies. The Office of Fair Trade has a role to balance between the concerns of the consumers as well as the investors (Ronchi, 2002). However, Britvic did not put the customer concerns while developing the merger. As the article said, the drive of this merger seems to be shareholder oriented with a sole aim of optimizing profits with minimal consideration of customers. As Adams&Juleff (2006) indicates, companies aim at maximizing their profits at the expense of the consumers. Therefore, it is crucial for OFT to investigate the possible impacts of the merger on the consumers. Merger policy ought to block some merger entity to minimize market power increases (Martin, 2008). As OFT provides, it is clear that the prices of products are likely to rise post-merger. As a result, the consumer will be subjected to exploitation from two monopolistic companies (Treanor, 2013). Increasing monopoly power would reasonably raise barrier for new entrant thereby further stimulate the monopoly concentration. Such a merger will shift the burden to the customers (Lipczynski et al, 2005). It may be advisable to reduce the dominance of Coca Cola to avoid mergers that will reduce market competition. Article 2: AG Barr and Britvic Merger Thwarted by the Office of Fair Trading The article points out to the Office of Fair Trade as a biased regulator who protects foreign companies while failing to promote host companies (Ruddick, 2013). In UK, the impact of encouraging foreign companies can be identified from the dominance of Coca Cola companies. such international companies enter the market and launch unhealthy competition in the country which completely demoralizes the local investors. This explains the “national Champions,” AG Barr and Britvik are struggling to amass enough resource to overcome competition by a foreign company (Ruddick, 2013). On the other hand, the idea of protecting foreign companies is an issue that remains debatable today. Large international companies such as Coca Cola are efficient and have enough resources to compete with domestic companies. In particular, Coca Cola is an innovative enterprise since they invent first carbonated beverage in the world and continue to innovate on new product development, product line development and brand and package innovation in order to maintain dominate market position (CCE, 2014). It is reasonable for a company with efficiency and innovative production process dominated the market and drive out the companies whom without the ability of efficient allocating the production factors (Schumpeter, 1942). The creative destruction of capitalism will choose the suitable company with persistent innovation ability and reward it monopoly power (Schumpeter, 1942). It is essential for merger policy to maximize the efficiency gains that prevent from merger which increase the market power (Martin, 2008). Promoting domestic companies ensures that the local investors are safeguarded from foreign competition which is inefficiency. It discourages foreign investors from entering the market and hence domestic companies remain at the top to gain abnormal profits arise from administrative monopoly. While this may be a way to support a local trade, it kills innovation and business optimization that arises in a competitive market. Moreover, the world trade organization requires that the market remains liberal to ensure that there is global interconnection (WTO, 1995). Therefore, the Office of Fair Trade has obligation to protect international companies as well as domestic companies within the domestic market. Essentially, international business ethics suggest that market competition is crucial to foster business development. However, the OFT idea of “competitive constraint” is in line with the consumer welfare theories that seek to defend the consumer within the market because increasing monopolistic power will harm consumer welfare (Ronchi, 2002; Lipczynski et al, 2005). OFT argued that the two companies had homogenous products and this explains why merging would reduce price competition and hence lead to high control of prices. As Mcafee &William (1992) indicated, consumer welfare would be harmed by the merger that would enhance monopoly power of exist dominated company or create another monopoly entity. The merger will promote a duopoly market with the main player controlling prices while the consumers lose their bargaining power under this circumstance. The development of better policies seems to be a crucial agenda for OFT if they have to prevent market dominance and still facilitate innovativeness. The dominance of effective companies can be curbed by use more sensitive tax policies to allow the growth of weak companies (Huang, 2012). Bibliography Kim, W. C. (2005), Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant/W. Chan Kim, Renee Mauborgne–Harvard Business Review. Ronchi, L. (2002), The impact of Fair Trade on producers and their organizations: A case study with Coocafé in Costa Rica. Policy Research Unit. Sussex: University of Sussex. Ruddick, G, (2013), AG Barr and Britvic Merger Thwarted by the Office of Fair Trading. 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