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WHEN THE GOVERNMENT PLAYS IN THE MARKETAntitrust Actions
Review Markets
ANTITRUST LEGISLATION
The Problem with few firms• Interdependent
• Game theory
• Collusion• Relatively formal but illegal agreement
• Tacit Coordination• Informal coordination with uncertain legal implications
• Mainly Price Fixing
Antitrust Laws• Sherman Act (1890)
• “…restraint of trade… is declared to be illegal”
• Clayton Act (1914)• Made illegal:
• price discrimination, exclusive dealing, tying contracts, acquisition of rival stock, interlocking directorates
• FTC Act (1914)• Declared “unfair methods of competition” illegal
• Hart-Scott-Rodino (1976)• Requires government review of all proposed mergers
Antitrust Cases• Vertical Mergers
• Merger among suppliers and sellers• Efficiencies• Capacity constraints
• Horizontal Mergers• Merger between two competing firms• Efficiencies• Loss of competition
Areas of Interest in Review
• Market Definition• Seller Concentration• Ease of Entry• Other Market Characteristics• Cost Savings and Efficiencies
Mainly looking out for the consumer and society: Asking what will be the effects on prices, quantity offered
and potential innovation.
NotesDefinition FTC Coca Cola
Market Definition
Seller Concentration
Ease of Entry
Cost Savings/ Efficiencies
Other Market Characteristics
Market Definition
• Asks what are substitutes? And how many are there?
• Narrow vs Broad definition depending on goal
All bottled/canned beverages
Soda
Seller Concentration• Measure of concentration of market share. How close to
monopoly power?
• Measure with Herfindahl-Hirschman Index:
• = Sum (Market share each firm) 2
For example, two equal firms each half the market
HHI = (50x50) + (50x50) = 5,000
Herfindahl-Hirschman Index (HHI)
• Another Example:
• HHI can vary from as low as 200 to a max of 10,000
Firms Market Share
Squared
Firm A 30% 30 x 30 = 90
Firm B 60% 60 x 60 = 360
Firm C 10% 10 x 10 = 100
HHI 550
Herfindahl-Hirschman Index• If pure monopoly: one firm= 100% of market• HHI = 100*100 = 10,000
• What if two equal firms,• HHI = (50*50) + (50*50) = 5000
• What if four equal firms,• HHI = (25*25) + (25*25) + (25*25) + (25*25) = 2500
• What if 10 equal firms = 1000
So What?
• During the 2000s:• an HHI score of 1,800 or higher was deemed a
concentrated industry, and a merger that increased the score by more than 100 points.
• Since 2010 Concentrated is above 2,500 and 200.
HHI Assessment ExamplesBelow 1,000 Unconcentrated Machine shops,
Footwear, Butter, Milk
1,000-1,800 Moderately Concentrated
Dog/Cat food, Chocolate & candy manuf
Above 1,800 Concentrated Autos, Cereal, Tobacco
Ease of Entry
• If positive economic profits, how easily can new firms start-up?
• Consider:• Control of resources• Distribution channels• Economies of scale• Advertising needs• Past success/fail rates for new entrants
Other Market Characteristics
• Will there be savings to the producers that can be passed along to the consumer?
• Will the greater market mean lower ATC? More efficient?
• Is there evidence of past collusion?
• Maverick firms? 4 min radio clip
1986 COCA-COLA PROPOSES BUYINGDR PEPPERFTC v Coca-Cola
Carbonated Soft Drink Market
Coca-Cola to buy Dr Pepper
Pepsi to buySeven-Up
Producer Share
Coca-Cola 37.4%
Pepsi Co 28.9
Phillip-Morris (7 Up) 5.7
Dr Pepper 4.6
RJ Reynolds (Sunkist, Canada Dry) 3.0
RC Cola 2.9
Procter&Gamble (Orange Crush, Hines Root Beer) 1.8
Others, generics 15.7
Market DefinitionAre the firms actually competitors?
FTC
Carbonated Soft Drinks
Coca-Cola
• All potable beverages, including ice teas, milk, juice, etc.
Seller ConcentrationHow much of the market do the sellers have?HHI = Sum of squared market shares
FTC
Carbonated Soft Drinks, therefore increasing concentration
Coca-Cola
• All potable beverages, including ice teas, milk, juice, etc. and CSD only 25% of the whole market.
Soda Seller ConcentrationUS Retail Sales 1985 With merger
HHI = 2553 HHI = 2897344 point increase
Producer ShareCoca-Cola 37.4%
Pepsi Co 28.9
Phillip-Morris (7 Up) 5.7
Dr Pepper 4.6
RJ Reynolds (Sunkist, Canada Dry) 3.0
RC Cola 2.9
Procter&Gamble (Orange Crush, Hines Root Beer) 1.8
Others, generics 15.7
Producer ShareCoca-Cola –Dr Pepper 42
Pepsi Co 28.9
Phillip-Morris (7 Up) 5.7
RJ Reynolds (Sunkist, Canada Dry) 3.0
RC Cola 2.9
Procter&Gamble (Orange Crush, Hines Root Beer) 1.8
Others, generics 15.7
Check-in• If included all potable soft drinks in market share calculation what would happen to the HHI?
• A. Be lower• B. Stay the same• C. Go higher
Ease of EntryWhat barriers to entry exist? Could market power be challenged?
FTC
- Advertising “$44mil Cherry Coke” “a sunk cost”(4x expenditures other food items)
-Access to bottling plants and distribution-Access to stores and vending machines
Coca-Cola
• Just flavor, water and bottles – no big deal
• Could use beer or dairy distributors
Flavor Restrictions
Minimum 10-20% market share
Provided access to grocery shelf space Limited fountain and
vending machine access for new brands
Other Market CharacteristicsAny history of collusive behavior?Global or innovation challenges that may change market?Efficiency gains?
FTC
-Fewer players makes collusion more likely-Coke had tried and failed to market a Dr Pepper-like flavor-Past data showed high and similar rates of return
Coca-Cola
• Only Pepsi-Coke rivalry matters and merger makes it more intense
• Too many different products to coordinate price changes
THE VERDICT“The acquisition totally lacks any apparent redeeming feature”
Or “No”
Soda Market Today
Coca-Cola (42.8 %) Fuse, Sprite, Minute Maid, Dasani
Pepsi (31%) Gatorade, Tropicana Mtn Dew, Sierra Mist
Dr Pepper/Snapple (15%) Canada Dry, Welch’s, 7-Up, A&W
Case Study: GM and Post Merger
• Each group will get a packet with the article, market share data and a merger review table. You may want to put a merger review table in your own notes as well.
• Fill out the table for the proposed merger.
• Use the market share data and the article The Cornflake Cartel to give evidence for each side and each area of review.
• Reach a verdict – Will you allow this merger?
Cereal Merger
• In groups evaluate a merger between Post and General Mills
• Consider:• Market Definition• Market Share & HHI
• Barriers to Entry• Past non-competitive behaviors• Efficiency Gains
Firm
Market Share
Kellogs 38 %General Mills 27Post 11Quaker Oats 7Ralston 5Nabisco 3Other (generics) 8
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