B. Allen W. Mullin P. Segerstrom January 1996

Preliminary Exam in Industrial Organization

There are three sections in this exam. Answer all three questions in the first section, and choose one question in each of the remaining two sections. You should budget approximately 45 minutes for each question.

SECTION A: ANSWER ALL THREE OF THE FOLLOWING QUESTIONS.

1. Consider a model (originally due to Hotelling [1929]) in which a "linear city" of length one lies on the abscissa of a line. Consumers are uniformly distributed along the line segment and there are two firms which sell the same physical good. Transportation costs are linear in distance and the two firms compete in prices. The two firms' locations are fixed, and they are the two extremities of the segment. The firms have constant marginal costs, cl and cg, which are not necessarily equal (but for simplicity, assume that they do not differ too much, so that each firm has a positive market share in equilibrium).

(a) Compute the reaction functions pi = &(pi). Infer the Nash-equilibrium prices pi(ci, cj) and the reduced-form profits R(c;, cj) as functions of the two marginal costs.

(b) Suppose that, before competing in price, the firms play a first-period game in which they simultaneously choose their marginal cost. (Think of an investment cost $(c) of choosing marginal cost c, with q5' < 0 and q5" > 0.) Show that this investment game gives rise to a direct effect and a strategic effect. (Hint: use the envelope theorem.)

2. You are conducting a study of the plate glass industry in the Cnited States. There are many firms in the industry, but the Department of Justice suspects that the firms have found some way to act collusively despite the absence of a formal agreement. You have been asked to study the industry to determine whether collusion is a problem.

You have twenty years of weekly time series data on average plate glass prices ( P ) and quantities (Q) as well as data for a variable measuring housing construction (I) . Housing construction (I) is an independent and identically distributed random variable which affects the demand for plate glass. In particular, in each period, housing construction is either "high" (I=l) or "low" (I=O) with equal probability.

You have no data on the costs of producing plate glass. However, you are told that the marginal cost of producing plate glass does not vary with output. There are no fixed costs.

Assume that the demand and marginal cost for plate glass take the following form:

(a) Given the data available to you and the assumed functional forms for demand and costs, can you distinguish between competitive (P=MC) and collusive (MR=MC) behavior? Derive your estimating equation(s), and explain whether each equation is identified.

(b) Now suppose that housing construction (I) also affects the marginal cost of pro- ducing plate glass, through its effect on wage rates. In particular, you are to assume that the marginal cost for plate glass takes the following form:

Given the data available to you and the assumed functional forms for demand and costs, can you distinguish between competitive (P=MC) and collusive (MR=MC) behavior? Derive your estimating equation(s), and explain whether each equation is identified.

3. This question asks you to think about some similarities and differences between airline and trucking deregulation in the United States.

(a) Explain briefly why the federal regulators of these industries could not use the approach employed by state regulators to set electricity rates: determine each firm's prices so that the firm's forecast rate of return equals its estimated cost of capital.

(b) Sketch (algebra not necessary) the argument that the regulation by the Civil Aeronautics Board of airline fares in fact determined product quality, not airline rates of return. According to this argument, what determined rates of return, and how? Briefly discuss the applicability of this analysis to the trucking industry.

(c) Indicate how you would go about testing the hypothesis that trucking markets are perfectly contestable. You may adopt designs that have been applied to studies of the airline industry, and you may make plausible assumptions regarding data availability.

(d) Suppose the study you outlined in (c) finds that trucking markets are not perfectly contestable, but that departures from perfection are small. Would this lead you to suspect that trucking deregulation was not associated with the emergence of price discrimination? Use both theory and evidence in your answer.

SECTION B: ANSWER ONE OF THE FOLLOWING TWO QUESTIONS.

4. Valujet has accused Delta (and TWA) of antitrust violations in connection with pro- posed gate- leasing transactions (See attached Wall Street Journal article, 1 1/28/95).

(a) Assuming that its charge concerns unlawful monopolization by Delta acting alone in violation of section 2 of the Sherman Antitrust Act, what, in general, must Valujet prove to obtain a judgment that Delta has acted unlawfully? What facts would support such a charge?

(b) Assuming that its charge alleges a conspiracy to monopolize (Sec. 2 of the Sher- man Act) and/or a conspiracy in restraint of trade what must Valujet prove to obtain a judgment that Delta and TWA have acted unlawfully? What facts would support such a charge?

5. Last July, Kimberly-Clark agreed to acquire Scott Paper; both are well-known produc- ers of paper products. Immediately, there was speculation about the legality of this merger, which could conceivably violate section 7 of the Clayton Antitrust Act.

(a) The language of the statute forbids mergers and acquisitions which or

(b) There is considerable information in the Wall Street Journal article (7117195) about this transaction. What facts might support a U. S. challenge to this acqui- sition? What facts might support its defense? What facts are missing that would turn your tentative findings into a clear decision, and why are they crucial? (You may be aware that the Department of Justice and Kimberly-Clark filed a consent decree committing Kimberly-Clark to certain actions and allowing the merger to go ahead. If you have such information, feel free to use it. However, your an- swer should focus on the possible anticompetitive effects of the acquisition, why it could be challenged, and actions Kimberly-Clark might propose to "sanitize" it.)

SECTION C: ANSWER ONE OF THE FOLLOWING THREE QUESTIONS.

6. A good deal of recent empirical work in industrial organization focuses on differences in prices, profits, or costs over time or space within individual industries.

(a) Intra-industry studies that look at differences over space tend to use high price as a signal of market power. What are the advantages and disadvantages of this approach as compared to inter-industry studies that use high profits as a signal of market power?

(b) Wage rates are often treated as being exogenous in this literature, and are used to control for cost differences across the geographic markets. Evaluate this exo- geneity assumption and its implications for the interpretation of the results found in studies that focus on variations in profits or prices.

(c) In a much-cited study, Lee Benham found that eyeglass prices were higher in states that prohibited eyeglass vendors from advertising than in states that permitted 1 advertising. Evaluate the contention that this study proves that advertising is pro-competit ive.

(d) Bresnahan and Reiss studied small, isolated towns and, for automobile dealers, doctors, theaters, and other businesses, estimated R = (smallest population for which 2 firms appear)/(smallest population for which 1 firm appears). They found that R > 2 for most businesses. What conclusions, if any, can be drawn from this result? (Be clear about what sorts of models you use to support your conclusions.)

7. The baby-formula industry is periodically the subject of antitrust attention. Usually, cases are brought by private plaintiffs (or state governments) and charge some form of collusive activity. (See attached survey article, Wall Street Journal, 5/25/93).

(a) What characteristics of the industry invite its firms to attempt collusive behavior'?

(b) Assuming that there has been some (at least tacit) collusion, what practices were used, and what were their immediate objectives?

(c) How, if at all, did the industry's major firms try to deal with competitive entry?

(d) Evaluate the claim of a plaintiff formula buyer (say, a State welfare agency) that the formula makers are involved in a conspiracy in restraint of trade in violation of Section 1 of the Sherman Antitrust Act. What must such a plaintiff show to prove its case, and what kind of civil (injunctive) relief could it expect (or would it try) to obtain? (NOTE: As you might expect, small-entrant Nestle/Carnation filed a suit alleging monopolization in violation of Section 2 of the Sherman Act. You are not asked to evaluate this antitrust claim.)

8. Consider an n-firm supergame framework. The firms have constant marginal cost c and produce perfect substitutes. The lowest-price firm gets the whole market and the firms share the market equally when they charge the same price. The demand function at time t is qt = pt D(pt). If p > 1, then the market grows over time and if p < 1, then the market shrinks over time. Assume that p6 < 1, where 6 is the common discount factor. Derive the set of discount factors such that full collusion (i.e., the monopoly solution) is sustainable as an equilibrium of the supergame. Describe the strategies being used by the firms. What would this model predict about the relative ease of sustaining collusion in expanding and declining industries?

I Methods of Marketing I Infant Formula Land [ ~ b b o t t in Hot Water I It Pushed Baby-Food Rivals I To Bar Ads, Limiting

A New Player's Chances

A Big Antitrust

By THOW M. B ~ N . Stdj o j Ttm WAU S m r m Jomnn

CHICAW - tikc clock~ork. Abbott Laboratories for two decades ha3 posted 15% profit Increases annually. For much of [hut achievement. credit baby formula. [he concoclion ol milk and vitamins that Abbott sells at princely pharmaceut~al- level prices.

On 18 occasions from 1980 through this year, Abbott ralscd the prlcc of Its Similac formula by a total of 207% - slx tlmes the increase in the coruwner prlce af rnlllr, its bask Inqrrdlent. By lsrt year. ttH -'&

'

top maker of formula was Kltlng $1.1 bllllon of It anmalty, or 14% d ils total sales and about 16% *flu.

But Abbott's lucratlW, brby-fomdq pmsptrlty resdted from r multlycar often- slve that lncludtd W)cr with 0 t h f~nnu l r makers and ca8h to the Amerl- Academy of Ptdirtrlcl. McmwhM, A& bott8s ma tabontorlea formulr-making

. - unit also enga@ In the syrtematlc d c struction of internal documents. Company and industry ncordr show that Abbott played r mtnl mk In penu4d4 rl- t o a p n a t o m ~ W u & e W erected a burlu to new compctlton by d l m n g dvc-nll Of f* m U Medlcal AuWmm

: u.S. formyla compmks also have I:lr. l m d millla& ol dollur on pediatricians rd uu.mtrm of ~cdirtrtcs.

fanauk rdwrtlrlng, my llnL to Abbott'r

a paid for docton' trips to d i t a t mclnp clccordlng m people hmlliar rrttn tncW pnctim.

Thls f m u l r for Abbott'S sUCCtS8. how- cm.cou#paor!lnuNhltlvcrttaW company. Rchg fcdarl M U t M t all- uonr t m m 2 T ~ u d f o o d ~ l N .

' along d m chugs lrom the Ploridr r t tor ney genef8l of Md.rllllng, A W t t ya ta r day settled for mon Vlan $140 mlllion. The

a settlement. whow p ~ b e terms wefen't disclosed. wraps up consolidated antitrust

1 litigation In federal court in Tallrhurec. 1 Flr.,andllghl@Urscrlcrofrrcentcrsu _ _ , . . . .

-~ --.---

m i l e ~bbo~'hcd~ncd ~o comment ~or this srtlcle, il said yesterday that it

, w u "pleased to conclude UIL matter." I t denied any wnmgdoh# and said tht il compete8 "mponribly, aggra8ivcly and completely within UM Irl* and that the settlement "will not hm an impact on reported net earnings." The company da cllned to elaborate. Hlgh Stakes

Abbott still laces antitnut actions filed last year by the Federal Trade Commb. sion. I t faces nlne stateuntrt Irwsulu related to baby-formula pridng. Ruther, flve other statar' stlU am investigating whether Abbott vlolrted antitrust laws. Abbott'r top two compttlton. Bristol-My- e n Squibb Co. and American Home Prod- ucts Corp., last year settled slmilar antl.

I I tnut charges in Florid& whUe nulntaln- lng th8y:hadn't vldrtsd m y laws. Totol ' settlement payments by rll Wee compr-

, .nluexcccdmomllIbn. The stakes us Ngb la Amcrlan fami*

, liu. too. At current prku, m y bablcr consume mar mon of fonnulr r month, 8 slgnlficant burden f a m8ny famllla. Florldr'r. attorney tmtnl cakulrtcr Umt

cost of production ind daUvwyi For the m t pul, baby. fonnulr Is

pretty much the sum. Ptdia(rlcnutrltloa experm agree that M t h y babla whase mothen don't bnut- fed tMve equally well on all commercirl baby fonnulr, dc sp~te s i i~n t d~ferenaa in rbdiava 11ke iron, vegetable fat8 md unino rclds. "For the herltby brbg, probably rll tha t omu lu are cq~rl," uyr tmrenca GMntf. c h a m d 8f m Unlventty d Utlago HorplWI. "Cmnp& n i a attempt to diffemntkte tlmnsdm u unique, but w h c t h ~ any ol the dillcnnca have any e f fw on Wlea b.wpmwn." Rivalry From Abrod

Abbatt en- tbd baby nutrltka burl- n a I n 1964, purebu la l fo r t l tm lkn in stocllthecomprnynaralltdRorrtabtP n t o r l u o( Cdumbur, Ohb. Abbott built I t to U.S. industry badanhip By 1980, thougn. 8 dark ckud M. Word

PkseW(oPPOIA6,CbtYRlll .

' A 6 THE W A U JOURNAL TUESDAY, MAY #, 1993

i Over the Marketing Met hods of Its Infant Formula i , ~ o n t i n u d ~a m Rqp . emerged that N- g . ~ , the wwld's

largest food mprny and me lead in^ formula selln overscar. planned to jump into the US, market.

8ut the Swiss concern had an Achilles heel. Nestle had been hit with aconsumer boycott over the way i t marketed infant formula to Third World mothen: health professionals claimed i t urged women to Rive up breast feeding, which med ia expem say generally hao healtn advan- tages over formula.

William Smatt. Rm Lab' prtsident in the early 1980s, devised the idpa of a formula-industry code of .behavior that would, among other things, condemn con- sumer advertising, according to deposl. tiono in the Florida Ilugation, ~ h b pmd. ,ion, not inci&l ly, mu ld hamprr ~ e r . t1e.s ability b compete In the U.S, market because the company relltd heavily on consumer marketing.

Abbott didn't n e a toadven(se bow of ofsa,es rrptcsentativm contacts at hosgltals and with doctors. Abbot1 had cultivated S U C ~ ~ ~ ~ t ~ 0 I I S h i p S over decades - ilnlu Nestle couldn't easily dupliate. T ~ W m d c a l me- a n mum as " e t ~ c a ~ m a r ~ n g . "

The emla have h n dub-. m u l a -

I

for code \an- that "not pmant Intolerable ent1-t ppmblem." The memo d d b Mr. Johnson as aylw that I f federal a n t i m t en fomn objtcted to pomons of w e , amprni" *- then unilaterally addms these ansr in linilattrally adoptiny their own code:'

' makes, including Abbott, have extended Abbott dWinn lo comment on ttte men,". benefits to fncdical students and pediaw- While thae ta lb continued. Abbott and cians that included school loans, granu, the 0th- manufactwn N r r l y mired Payments for medical artlcles and trips to f0I 'm~l l In w b t crlt la dclcrfk conferences. according to people familiar M lock-step fashion. Companies would with these tactics. In testimony before raise prtces within weeks, or often days. of joint Senate panels in 1991, Jerome W. one another. The difference among the Hoffman, antitrust chief i n the Florida ULne companies In wholeae price per attorney general's office, told of outright can often mnacd from zero to three cash grants of "thousandr of dollan" from cents. "Lock-step prtclng meant there f0muh companies apparently to indurn didn't appear to much ~ompctltion ln Physicians to recommend specific p ~ . ' the i n d ~ t r ~ , " Says Stefan ~arvey, who UCU. I co-aulhQM reports on pncing for a Wash-

a w mt fun&." The Induttry. IMubinl A b m * a h in at least s3 m l l l h M the $10 million n'

the a*emy's headquart ' GfUw Vlllrge. Ui.9 In 1983.

At the biannual meetings of the Amerl. I Can Acadcmy ol Pediatrics. ,formula com. ponies still regularly pick up the tab for cocktail receptions. They award rerearch money to pediatricians.

AbbOtt Oenerally a w e s it mweb baby fOrnlUh Ulmugh doctors beerum physici8ns Cm best appdse 8 mother d her baby's nutrlnonal needs-

The blu U.S. formula companies' mar- keting also includes avlng away millions 01 "discharge packr" of formula Lo mothen itavlng hOSplt.Sl~ With their Ib

lndwm bnt0W8 major *ntrlo butions On many b p i u @'sfwe Prl*llW Of g l v l n ~ away m u m t h e . ~ n d that. of awnc, offers a cnance to entice a new C ~ ~ ~ r * @Ssibly fof em* atlons: I f parents find their infant thrive on Similac or BrisW-Myers's Enfamil or Amedcan Home's SMA, they tend stick with It.

New competition could threaten thh arrangement. . k e l F. Johnson, Abbott'r general cwrucl and senlor vlce pmldent. began in the e v l y 19841 to contact counter

Ington'baed non-~roflt UP, the Center for Budget and Policy PnorttieS.

In a January 1m meeting at New York'r Park Hyatt/United Natlons Plaza Hotel, extcutivcr from Abbott and the 0- c o m p ~ i ~ hammered out pints d ~ m ~ n t 0V8r h n ~ of an antlad- vemlngcobc- r d l n g to famliiar wlth the meeting. The follawlng month, at the S O ~ U Btach on Key Blr- caync the fonnur mm* indusW

r@rovd t h code* Amorno by Mr. *Ow** the 'w It wu Mr. Joharoa who dtviud the indmvp's ntion-

for omla: w.fmlng 80 1mw-t to ~umlfi

~ * C ~ O n c o m W ~ t l o n . Hosmcr, in congressional t t s t i m ~ v

UkFTC8 deputy Of WUuon* Mary said aboub f m ~ I 8 lndmm: "The a n t i a t laws do proNblt 8gretmenu among competlton to nfIa!n from amrtlringl even when lhe -puton pmfm laudatory such the public he*th Or wetv." And

Jutice Dcputment the industry parts at Brlstd-Myers and Amerlcan Home ProducU to push for an antiadvtr tising code. accordlnt to a depositioll he , gave In the Florida litigation. Extensive ,

negotlatloru - invariably inclucHW tho Wee fonnuia maken who once shared about 98% of the U.S. market - ensued u the industy P ~ P - .a code to a- coruumer advertising.

At a Scpt. 2,1983. mttting at the O'Han Hilton in Chicago, Mr. Johnson urfrtd the no-advertising clause on other members of an industy e w p called the Infant For- mula Council. A memo. from one [PC irwyer s h o n Mr. Johnson was concrmcd even then abu t whether these actlvltles might M a t e rntitnur law. Avolding RObltm ' - .

tie memo. by aitonrey Stevc~~ M. Kowal, which entend u evidene in Florida, ap ~ r . Johnson w u loowng

* well laws. Academy Skpr lb

It w u at [Ma pant that uu Amencan ~ a d # n y d PcdlrVicr entend thc picture. m~w iu opp# lm to rdvertlsing. I t mcd, that W r t l t l n g could dlminish br#rt Iuag. But the academy may not IUW bmr r d l s ~ n t t r ~ ~ t c d third party. glven the contrlbuttonr m t i v cd from the f m u l r indwtry. Todry thc formula m a e n wtr lbute about t i million annu- ally to m rcadcmy. ~bbo t t IS the blggest -. Jw 8. Shin. the academy's

dimtor, ray r h money IS

far aduuting ywng physl- dm.

Dr. Sbain defends the academy against suggmh of 8 conflict of Intereat. "The

wm any quUM Of mfiw*" he says. "We'vcdiscuucd it at length. and we're not the PmfmIonal

". I U,S. -IS R k i n g Valu Ja Allegations .

0i;~ntittust Yiolations bv Delta. T WA ~- -~

wfQlporterr of TIES WALL m.rr SOURMU WASHINGTON - 'Ikro federal agencies

are .reviewing allegations that RMS World Airlines and Delta Alr Lines vie lated.antitrust laws in a deal over access to New York City's 1;dGuardia Airport.

T& Justice Department and the Trans- portation Department are looking into alla gations made in a lawsuit filed Nov. 9 by Vsmjet Alrllnes In federal court in At- ~ . -~- - -~ -

lant&zThe lowcrwt carrier sald TWA reneged on an agreement to lease it 10 slob at w r d i a . instead leasing the slots-or take& and landina prtvlleges - to Delta. vaU&te whlch has-no slotsat LaGuardla. t

ha$:Mped to launch service before the Chditinar hoilday between LaGuardia I i

4

matter. "We've heard nothing on this," he sald.

ValuJet planned to offer tam as low a, $178 roundtrip between LaGuardia and Atlanta. Delta. with 'is2 slots at LaGuar- dia. is the only airline that offers nonstop service between Atlanta and the airport. Delta has 16 daily departures each way,

1 with the cheapest fare at 5391 mund. trip for tickets purchased 14 days In ad-

, vance with a Saturday stayover. 1-

and J~anta. Wormal investigation has begun. But

gov#bment officials. an reviewing new infeat ton in the lawsuit to see whether it su$gests Delta is Vylng to keep ValuJet frobtofferlng low-(are service on the lucm tive &tlanta-UGuardla route. Both Delta and.Va~u~et are based in Atlanta.

Economics 842 / A1 1 en Final Exam Arti cl e Package December 16, 1995

--.. . - ~ -

Justice Depamnent spokeswoman a&we*rt a- of me situation a we aa,nvlewing 1MIa rakd by tht law- suiVIShe dtcllned to elaborate. A wakes- m d i o r the lhnsportation Department ddlhIed to comment.

HaluJet amended its complaint last w&:to focus more strongly on antitrust i s s w after a federal judge refwd to blrxkthe slot=lcasing agmmtnt between nN and Delta. t m *minute late- daw wh&carrienucallooredtotaktdfa lan&'ValuJet's suit allege! Delta M no interest In leaslng LaGuafdla sloO uatll it learned ValuJet was about to lease them. Valet 's amended lawsuit cites a vole man message from a TWA vlce pnrldent to % ,@uJet alRdal saylng the tao putla "Md~dcal"forthelesrcdtberka goUl TWA and mita say tea 4ada

Valu Jet Sues T.WA, - ( UIwm to p~W'cuttm," VrluJet asserts In L hwmk "Thlr L kn the la-t

-

. - ,~ .- # . . . . . -... . . . . ::.:: :.-pladrtolgw &wb *-vilrJe; ( . mmpt vwn m-pnr. Delta O m - Access l). -awI

cl- a n false. A spoLanun lor TWA. wkliich is based in SL Laub,#ib"We Mrr : noi been contacted by tll-t of JuStice, so we would brrr m w " A DeiM spokesman rrY tb Mine pvu ql rareof ally #uVmmtnrk.dtIle -. -. - I:

; -0yitSAmiA~rrunrrcrur sdqn-dmw*k.l..rtornru:

: A T L A N T A - v ~ ~ ~ ~ ~ ~ ~ ~ ~ In:1cdctd court hm ag8iuKt ma wr2d Attllacr and Air meh cmgfng beach of coneact and triolrtba d mtl. k t lam om access cp,~cr Y* ~8 UiCuardlr- . -

+* : ~ d l r ~ e t c m ~ ~ ~ 1 1 a o u t $ UlrOmmcattokrwlOJotlrt~~ d@mdlnatudlcarcdtEemiand~ prlvllega, to Delta, wldch clPnatlt'* w$olW wrrlce between Atlrptr rPb LaGUaRu. wmdlng to tht lrrrrdt

:ValdttsrldItw8scbrcbinQodudry new servlct between Atlrpta and LaQw & d t h ~ t o d l a f o u r o r f l r s ~ 8 dd.wlth~1MIukrutta

: 'WerantedItbyDcc 15wweoadd W e the heavy (hrlsEma, hoM&y W- flc," said M a Jordan, ValuJet's pnd. dent Delta is the only &a that dfaa Mt*top W n l a kRttn A t k h 8 d h* Gltardfr, Wcb for many tnwers b the m-alrpartMloagm-rtnlr(l N p Ya% Qty. Delh'r. larrcrt rmnrb.trtp 1 ~ a h n s o M ~ h ~ L a O u u d L L s3mior8lGdryadrrPcspwclu#e~ with 8 S I a m y night s h y over.

"'Both Ddta 8ad TWA d q m d upon b ~ r u g . t k m w m

Artlcles on thts paae copyright @ 1995. by Do*. Jones 1 Co.

I A rootaromra fa D ~ W , rhlcb rn 151 cktr d IrGuudlr, uld It hasn't yet

1 r b b . T b c ~ n M , ' T b c n L m n l l d t b . . V ~ 8 ~ U U D e l b :-mrithrglgcld apalnarlth TIRAIoIrqrrrr.uPdanEladlt,~w~ W mcbd &I apeema~t rlth ValuJet * w r b t r " A ' K W A 8 p & ~ ~ ~ ~ s a f d Uncbulerua'kbollyrltboutrnerlL" ,

bcEadlal Q the krmdt, V W e t had h l - . r l t b T w A f t x t b e h

- ~ ~ 8 f ~ d a c e c a r l y ~ , a n d b e U m d U I u d m r g m m t n t ritb TWA oa Nm. L Tbe next day. rbestheputlrr~rtlPrPrldng0ut - 8 #pnt, qmundaMdling V r e s m a n t , T W A ~ ~ V a l u . , Jet U tbs QJ ma dl. VrluJet's Mr. I ~ u l d h e ~ T W A ' s p m t dea%kmaIPlCLlQ ~pFocsltrrtrathe k l b r s d m r m a n d r u a d v l s c d tndadOlrtthd8idabullo#toDtlt&

. 'Yk W m ritblmooa at two O'ClOCkrckllmdnh8d r d u l and24 b o u r r ~ P O I ~ d l d m m t h m a d c l l . bPtrnranMamdDsltaIudaflnn &a" Yr. krdrn #M. "I tdd [Mr. l iezldr#nlmrtpobolPbd~~Delta r u e m ~ , ~ : . ' :~tcr0crdq,rfdmlfudgamtd i'--ada~ocltlng T W A u d D a t E I f m ~ u n t i l t h t -aa klardtsd Umugbfurther hmu.#raoiara~rldu.

.

? I academy's f inam v m d paramount I concern as It consldertd whether to renew

I its public stntemenu against advenising. The AAP document says the academy's executive committee " a m that there is a need to make thir statement reaffiminu the MP ' s position on nUJ'kttlIlg, breast milk. lay advertising, etc. U there ts a marketing war, them k a shirt ~n industry's distribution of run& and the AAP may have 16 cut back on anticipated income from industry."

Dr. Strain says, however: "Then Isn't any connection between our positions and contribut~ons from induslry."

By conlrasl, Harry Jennison. the pedi. atrics academy's executive director until 1986. says, "I dld not reallre at the tlme how much we were being bought off. Now that 1 know the formula companies wc7i.o -

"Thm ccnrlnly was an effect of the antiadvertising push. and it c a w d the Carnation folks to come out of tne blocks ~10wer than they would have." says Daniel Ltmaitre. an indust r~anal~st withCowen & Con in Boston. For Nestle'# Part* Alfred

1 vemp, ~ b b t t malnblng it a matne , pllcy of dhardfng records for ! Cltn~y'l rake. But $ m v l n g documen&

Hlma reminded othm In the Rosa unit to "clean out your fllu bcfon year end."

In Novemkr le(O, Donald WQ, Ross Lab's vlce presldent. sales, wrote [ha1 "clean f l l a reflect a clean operation." He added a referen- o the Watemte bpes sandal: "Ifonly bfr, Nlxon rn wid atten. t l ~ . "

h ~ l t a I t s troubla, Abbolt doesn'l stem inclined to cbuyc I& pricing policy. LW month, ~t nw the wholesale prlcc o1.a 13.ouncr csn of Slmllac concen- I

tratt d0 @.a. 53 cents a can more than Naue/Cunauon's Good formula.

AnUtnrst ofndrlr ballew coruwnu ad- m W mtmia prla Inaeuts. " D m rsrpondbk dmQln#." sald Rorldr Utltrurt dinc(or b(r. Hoffman in con- tcrtlmony, "bring ' it p r l ~ competition that has k e n absent I

on formula, its largest slngle purchase. trying to manipulate the academy, I feel The WIC program has generally been absolutely duped." su~essful in driving down prices. That's I

For a while. there was at least one because many states now jointly bargdn ' advocate within Abbott for restralnlng for lomula, using their comblned market. prices. Jack W. Schulcr, Abbott president inf muscle to win lower Prices. Before durlng the late 1980a, argued wlth. then- loinlrrO a WesW'n-States Purchmin# chairman Robert A. Schoelihorn that bur. group, Oregon pald 68 cenb a can br geoning price inflation couldn't continue. powdered formula; now- It pays just half

"Everybody kind of knew formula wlw that. "Our MVlngS have exceeded $1 mll- a generic product." sap Mr. Schultr. "If It lion" a year. says Betsy Clarke, Oregon's came out that we were rtwff artlstS, it WIC director.

Multart, infant nutrition director at its 1 Carnation unit In Glendale. Calif.. says, "To ray that the acrdemy's 'porltion I

lagalnstadvenlsing] wasdamafingto our launch ptrhaPs the biggest undetstatc. ment you can make."

Nestle's Carnation formulas. though, have bewn making inroads into the lucra- tive federal low.income program for Women, lnfanu and Chlldren (WIC), which makes UP one-third of U.S. Indmtry #Its, by volume. In fiscal 1991 the s tab admlnlstered program spent $458 mllllon

would have hurt." He r t m t m b t n telling ~ r . Schoellhom: "You're going to get mwht9 tither by public MMQt O r o u W fmm p c d i a m m s or corwumen." Mr. Sch~l lhom fla Mr. mlm9 a famted the ~bbo t t board. Mr. SchoclUlom, who then himrelf ru forced out by the corn- pany's dlrecton, didn't mpond to

suggest r flxrtlon wc with efflcltncy, but

?WnulUr. & what you put tn mt. Ing," wrote C h v f a P. ma, b b a B vlce pmldent of m e u n g and u e r , In a July 1 9 ~ memo to Rosa executives. Ross meeting mlnutcs that month show that Mr. Hlmcs "emphaslw the n d to p m t ~ t conftdential Inlormatlon."

Four months later, he encouraged the Offlcid~ "to get rld of unnecessary r e Of'dS," according to mlnuter of a meeting at the ttme. And agrla, in k e m b c r . Mr.

Undemtmg the Compea(lon carnation recently won I t s first WIC

bid, to supply the wtrbrn sawa by substmudy undueutw its wmpaoaoa in prl@. may portend a m d n g WIG p'ce warMIong mmufacturen*

Even so, tn at least four ofher WIC bi& 1, ,990 - In Montana, Nemda, wet ~1,. I

phone calls. But under new Chairman Duane L. Bunrhoma ptice inCre8SeS continued unabated.

In Neslle nnolly the m m e t f o l m q its of Man* It =lllng Start and Good Nature (m call4 Follow.Up) brands. he foUowlng yeu. Brtrtol-Mycn teamed wlthGemr RodUCuCo** In Mlchlgan, to sell a Gemr formula brand.

new wr( DI lamly advenised din*ly to w n U . (An a eampaiqn ultimately w u launched.)

glda and Iowa-Abbott and Batol.Mycn from U1 l n d ~ t y for rimost ?D yean." bld exactly the same amount. a rebate to ' ' . - the stateof 75 cenU off I ts regular cornme clal prim for 13ounce cans dconcentntad m i k . ~ fomulr. (mm rm r nm her of states where thc companies* WIC bl& didn't match,)

kbbott actually had bcqun bidding IS. cent rebates In Connecticut in 1989. At the tlme. John Kane. then president of A b bott's Ross Labs unit. motein an internal ,ern rbout bid rrbrlcr tm compauton "may rsrpond to our smn# Waslstent Abbott IVntWed it8 att8Cb On , ~ ; e a-nw reredly to ,

bW. Abbott declined a m - what e a l ~ "a a Brtstol-Myen let- I

~ ~ e ~ ~ ~ . ? n * ' & ? p I ~ ~ antiquta W* -- s i m ~ *wan In - neath md n u t r l t h m d W , ~ O W R o r d t O ~

i Slnn then, N a t k and Gcrkr bnnQ have bctn slow lo rind success In tkU.S.; they cumntly M.about 5% md 3% of Ule market. respectively. Abbott, despite I twepoint drop in tne p u t year. holdsabouI a 51% share of Ute U.S. mulrtt, followed by BrlsU.Myerc98 27% md Amerian Home's 11%.

ter N e n t publicly rebate announced in several other. it would states bid - a a move the center for 8udget and ~ol lcy PriorlUr demwtbed as "undermining the '

w e d blddlng pmcedunr." But desauctton 01 docwwnb at A b 1.

bottt Ross unit could pose aa many pmb lems as these underlying evlentr. Many of the document~purge orden took place after Florida Assistant Attorney General Patrl- cia A. Connen had filed civil subpoenas, known as civil Investigallve demands, for Ross documents. Dtnylng talk of r cp

. . the sli;ailon say.

The tax-free transaction would com bine Kleenex brands with Scott tlssues. catapulting the combined company into the No. 2-ranked personal-care company In the U.S. and creatinf a far more formida. ble'conlpelitor for Rocter & Carnbl~ Co. The nicrgd glirnt would h;lw $11 billion in ~cunilal siiltBh . ~ n d ii dnm:nanl grlp on the tlssue and toilrt.oi~~er market.

Kimberly-ClarktoAcquireScottPaper In Stock Deal Valued at About $6.8 Billion i

0

Joining of Kleenex Brands* Scott Tissue to Create

Paper Powerhouse Paper produm ad US. m r m t mares sry segments

I

Facial t h e WY dm

0.8 Kimberly share under the merger pact. Each Scott sliare will be swapped for

NO. 2 Pt.1 w11aI-C~\rc Firm I 8t .U # I U o a M W d l k r

- 7b ?/W I{! > r t i F \ I . I I - I \ a I

Sousl. uw m r f h ~ I ! . . : ,

' Nou: Maw mrn bad an u.S. ~mray.Agnll9H dm qmt RIBI brd m U.S le94 0m .

And P \i ~rm TIIO\IAS Slafj Rrportrrr of Tll? WALL S t l E C T JOURNAL

Kimberly-Clark Corp. n expected to announce today an agreement to acqulre

I

I

I ! I

But because Scott's shares have jumped In recent weeks. the per-share value d the transaction. as of Friday's closing prices. wol~ld be less than Sco~t's closing ptice of 5.1y.12:r in compslrr trading on the Sfaw York Stwk Eschangc, pcq'le fanliliar with thesltuatlun say. A risein Kimberly's stock today. or anytime before the closlng of the transaction. would raise me value of the transaction to Scott shareholden.

Under the agreement. which technl- cslly would br a merger and therefore

Scott Paper Co. ~n a trwk twap that I , I

cul-ren:ly v,~iuc:, Scull .I! . \bur t i 3 rl shilre. I I

I'OUE~II\. 56 b t ~ l l ~ o n . i,eooie [,111ullar w ~ t h I I Paper ~ O W ~ S

Kimberly were in merger discussions. 1 Scott's shares have climbed on specula tlon I that a rival suitor willing to pay a premlum

'

Copyright @ 1995j by DOW: Jones 8 CO. price for the company would emerge. And _ _ - - weeks.

Kimberiy's shares softened a bit In recent :

But appanntty no cash buyer appeared I wtth an offer for the company at an a t t rac I tive price. and Kimberly's conservative I management wouldn't pay cash or pay a :

premium.Shanholdenof Scottwillelther 1 receive 0.78 of Kimberly's shares - valued ' ; at $45.72 based on Rlday's close-or 0.76 of ( Kimkrly's snMI cumnt ly valued at 1 $4.84, plus sham In the tobacco business

, that Khberly la spinning off.

Scott shmblden already have seen , thelr stock skymket dunng the past 15

L I : must be approved by sharettojdcn ol both cnmprnies. Wayne R. Sanders. chairman of Dilllas-based Kimberly, would b m m e c.hillrmiln andchief ( s \ ~ ~ ~ t l ~ ~ f ~ f f i ~ f ? r ~ f the cl)r!~n~nrd cornpdny. p ~ ) p l e Iirllllliar with the situation say. Albert J. Dunlilp. chair- man and chlef executive of Philadelphia- based Scott. would resign. after complet- ing one of the fastest turnamwds in corporate history. Mr. Dunlap is expected to rt!maln a consultant to the comhined

company. and Scott directors would re- i (

ceive t h m new seats on an expandpd I . Kimberly board.

Spokesmen for the two compijnlcs ; didn't return telephone calls yesterdav. ;

The swap ratio of 0.8 Kimberly share / ' for each Scott share was determined a ! , few weeks ago, before Scott's stock began -

its latest ascent. people familiar with the ' situation say. Since The Wall Street Jour. 1 ' nal reported on June 23 that Scott and

,

m u m . urp b L R -vn UIUumrn) mu^ bc vahm~ m excess of t~ mmm Kimbejy-Clark Plans 56.8 billion value ifrWall Street reacts pos~tlvely te the expected synergies from the cornblnation. One immediate benefit: TO BUY Scott Paper Scott shareholders would receive Kim- berly's d ~ r l d r r * ol 45 cenu quarterly. ; In $6.8 Billion Merger rather th8s current 10 cenu a quarter.

o n M*, ln ~i~ h r d composite trading, mmy's s h a r e closed at 558.625.

! year. is best known for its Kleenex facial and bathmom tissue products. Depend , ally s m n ~ businesses In

- Continued From Page AJ

tends to market valutpriced p d u c t s . MOS~ retallen tend b C a w the top brandt along with low end alternatives. squeezing

adult undergarments. Kotex feminine nap- kins and baby products such as Hugmes disposiible diapers. s a t [ Paptr, with an. nclill sales of ~ 3 . 6 billion. is known for its Scott toilet paper, paper towels, napkins.

Salomon Brothers advised Scott on the I out mid- ran~e ComPe~itors. sillc. and Dillon. Read S1 Co. was Kim. 1 ,

Scott is also the world leader In the berly's financial adviser. Officials there 'away-from-home" commercial tissue couldn't be reached. market. with a 20% share, an area w h e n

Kimberly, wlth sales of 37.4 billion last Kimberly 1s much weaker. 00th companla

But the merger would give crttical y in EUI'OW. its corporate

i Sore SWt. with about One-third of SCO~'S 1 revenue now coming from mW+t. It's

wet wipcr and other consumer paper Poised to provide EUropcm dlstrlbb producu.

! I tion that Klmbeg's products lack. "Ew ~ a t t ha$ b ~ n quietly looking for . is the NO. 1 varlable for Kim-

a suitor as part of the dramatic restmtur . . b e d ~ x l a d . " said Willlam Stele. maim ing of the company under Mr. Dunlap. who with Dean W i n s R w ~ ~ s I~c. joined Scott in April 19%. Shares of Scott "Il's. a very bold move for IKlm- dollbled last year and are up sharply this hurl!' C h a h I a n l Wafle Sandefl*" Mr. year. Stcele said. "But It's a move he has to

Mr. Dunlap sold some $2 billion in ' take,"

asseu. includlng health care and food services lines. The company also bob stered IU balance sheet by paying down 31.3 billion of debt. Some 11,000 jobs were cur from the work force around the dok. including sm of salaried employees. He's also selling the company's Philadelphia headquarten and moving it to Florida. though n o r the planned move is un. necessary.

Mort ansly8U thought it unlUtcly that Mr. Dunlap. who engineered d m i l u turn arounds a t Dlamond International and Crown Zellerbaeh for Str James Gddunith :n the 19W. would remain.

While investon were hoping f i r an all-cash bid a t a premium as Mr. Dunlrp'r last gift to luthddcn. sllareholden could end up wltb stock of a powerful company. Tbc m-a Wim is the potcntlrl la botb expaw reductbm and opmthul synergies.

i A n r l y l r r g products

and ~ U t ~ . Ru ow. KImkrly f W W primUlfy on hI#hm-end brands. while Scott. with Cottonelle. and Seotties,

I Please Turn lo P a w A 14, Colunr 6