Heinz-Beech Nut Merger THINGS TO FOCUS ON: Significance of Structure and Operation of the Market Key Evidence** (for Exam Q2) – Identify significance of

Heinz-Beech Nut Merger

THINGS TO FOCUS ON:•Significance of Structure and

Operation of the Market•Key Evidence** (for Exam Q2)

– Identify significance of facts– Identify missing facts that would aid

analysis

•Headers are Color of Strained Carrots

Heinz-Beech Nut Merger:

Background

Heinz-Beech Nut Merger: Background

2000 Baby Food Market Shares:

•Gerber (premium) …………….65%•Heinz (~15% discount)

………..17%•Beech-Nut (premium)………...15%


Proposed Merger:•Heinz agrees to buy Beech-Nut•Would sell both products under

Beech-Nut label•Claimed would use cost savings

to charge Heinz prices for Beech-Nut products


Legal Proceedings:• FTC challenges; controversial w/in

FTC– Investigative staff recommended ag.

challenge– Commission vote 3-2

• After trial, District Court upheld merger

• Reversed by D.C. Circuit


Significance of Market Structure

Heinz-Beech Nut Merger: Significance of Market Structure

FTC Position•Essentially viewed market

structure as similar to Staples – 32 in market w very high

concentration/ HHI numbers– Significant barriers to entry (BE) – Merger to duopoly in industry w

high BE = anti-competitive


FTC Position•Essentially viewed market

structure as similar to Staples •Because of market structure:

– Merger would yield less competition

– Efficiencies shouldn’t matter


Heinz Position• Structure = Dominant firm + 2

smaller rivals• Relative strength of G v. BN/H meant

little real competition by either smaller firm

• Merger pro-competitive b/c– H could compete better ag. G if stronger– H could lower costs b/c efficiencies


Lots of Evidence Supported Heinz

• Evidence of G’s Market Power:– G is pricing leader– G’s prices were rising faster than food

in general, but its input costs were not **

– G is sold everywhere; H & BN are not– G doesn’t have to pay fees for shelf

space


Lots of Evidence Supported Heinz

•Evidence of G’s Market Power:•Different from Staples re Retail

Choices– FTC argued merger would remove 1/3

choices for consumers– cf. Staples, many cities go 32 or 21– BUT here almost all cities have only 2

brands and would retain 2


Conundrum •Even if Heinz view of market

correct, could simultaneously be true that:– Merger allows H to produce more

cheaply & compete more effectively ag. G

– Merger makes collusion between G & H easier and more likely

Heinz-Beech Nut Merger: Effects on

Competition

Heinz-Beech Nut Merger: Likely Effects on Competition

Three Potential Effects Debated

1. Effects on Competition with Gerber

2. Effects on Innovation3. Incentives to Raise Prices

Unilaterally


1. Effects on Competition w Gerber

• FTC: Would Lessen Competition w Gerber

– Pre-Merger, H & BN couldn’t collude w G re price b/c each would lose shelf space to the other if they tried

– Thus, merger would remove impediment to tacit collusion between Gerber & Heinz


1. Effects on Competition w Gerber

Heinz: Would Increase Competition w G

a.H & BN can’t challenge G dominance b/c hard to expand

b.Merged Entity Could Compete Better c.Collusion with G Unlikely


a. H & BN can’t challenge G dominance b/c hard to expand

– Difficult to get new grocery stores to carry; won’t replace G, only each other– Would have to outbid rival for shelf

space – Would have to pay grocers costs of

change (restocking; alienation of old customers)

– Expensive to distribute & promote in area w/o minimal level of sales


b. Merged Entity Could Compete Better with G

– Combine H cheap production w BN premium reputation

– Efficiencies would lower costs; aid competition

– Would increase wholesale competition w G, which might then have to bid for shelf space


c. Collusion with G Unlikely– Hard to coordinate prices; time

lag for awareness of wholesale price changes

– H better off lowering price & increasing market share than colluding

– G internal documents predict more competition from merged entity, not tacit collusion**


2. Effects on Innovation

FTC: BN had been innovator, thus merger would reduce innovation in industry

Heinz-Beech Nut Merger: Likely Effects on Competition2. Effects on Innovation

Heinz: Little Pre-merger Innovation in Market

• G little incentive to innovate; would cannibalize own sales

• Innovation not good investment for BN & H– Low market shares = less sales to spread costs

over– H didn’t want to do national campaign to

introduce new products where only in 45% of stores

– H concluded pre-merger that not profitable to bring to US market 2 major innovations **

• Access to 85% of grocery shelves will provide merged firm with more incentive to innovate


3. Incentives to Raise Prices Unilaterally

• FTC argues loss of a major competitor will allow H to raise its prices.

• Heinz & BN argued head to head compe-tition was not restraining their prices

• Greatly conflicting evidence



FTC argues loss of a major competitor will allow H to raise its prices. Supported by grocer testimony:**

• Some retail competition between BN & H would be eliminated

• When both in market, tended to depress prices of BN/H & of G

• Threat to switch between BN & H sometimes associated w retail price competition (also supported by BN & H internal documents**)



Heinz & BN argued head to head compe-tition was not restraining their prices

• Internal & grocer evidence that they both priced against G and not each other.

• Study suggested very low cross-elasticity between H & BN; much more with G.**

– Done w shelf prices, not discounted prices (coupons)

– Parties contested significance of this.



Heinz & BN argued head to head compe-tition was not restraining their prices

• 2d Study**: No significant price difference between:

– Cities where both BN & H available – Cities where both available– Cf. Staples

Heinz-Beech Nut Merger: Debate re

Efficiencies

Heinz-Beech Nut Merger: Debate re Efficiencies

FTC: B/c market so concentrated, efficiencies would need to be extraordinary; not true here.

• Could have been achieved w/o merger–More investment in brand reputation by H–Plant modernization by BN–Sale of BN to other buyer

• Insufficient in magnitude to outweigh likely harm to competition.


Heinz: Efficiencies will Reduce Prices• Could consolidate production in more efficient

Heinz factory; expert: “extraordinary” savings**

• Could use Heinz multi-product regional distribution centers (big scale economies).

• Evidence: demand elastic enough so H profits more by lowering prices than by colluding

– H own experience: passed on savings re other products like cat food and ketchup**

– Econometric studies/simulation studies suggested pass-thru profitable for H**


• District Court accepted Heinz efficiencies arguments

• D.C. Cir. said not strong enough evidence

–Questioned accounting of cost evidence– Insufficient finding that H couldn’t achieve same efficiencies through other means

• Note importance of presumptions/burden of proof on complex issue (e.g., whether efficiencies could have been achieved w/o merger)


Concluding Notes re Evidence

Heinz-Beech Nut Merger: Concluding Notes re Evidence

• Use of Internal Files of H, BN & Gerber

• Difficulties with Major Types of Evidence:

– Economic Studies: Need to Understand Assumptions & Methodology

– Grocer Testimony: Impressions Could be Wrong or Atypical (cf. Aspen)

– Helpful to Have Both Where Possible


Questions?

Closing Up the Class (!)

• General Info on Exam & What I’m Looking For on Each Question Type (Today Tuesday)

• Review of Spring 2008 Exam (Tues.)

• Closing Argument (Tues.)

General Information

Related to the Exam

My Availability• Office Hours: Listed on Course Page

• I Will respond to – Typed answers to old exam questions if you

• Transmit by Sat 12/13 @ midnight • Follow directions on Course Page

– E-mail & Phone Qs until 6pm on day before exam

• Review session on 12/14: – 7 pm; Room TBA– I’ll do a little bit of substance, then take Qs– Will be taped

Exam Coverage• Substantive Law from Units I, II, III

– Except Vertical Restraints & Predatory Pricing– Includes Review Problems except vertical parts

of Toys R Us

• You won’t be asked to analyze vertical restraints, mergers or predatory pricing– Can refer to cases covering those topics if

helpful– Market & competition analyses in AR case

studies particularly useful

• Note: I can’t cover every major issue in the course in two questions

Exam = Open Book• You can bring anything that doesn’t talk

and isn’t programmable

• You should bring course materials & AR book; I sometimes reference on test

• Useful to prepare and bring checklists:

– Qs to consider for particular legal issues– Cases from different units that address same

issue• e.g., market power• e.g., claims re non-economic interests

Dangers of Open Book Tests

• Under-Studying/Over-Reliance on Outline – Insufficient time to look up material– Use outline as security blanket or for

checklists

• Reliance on commercial sources; old outlines; old model answers– Responsible for Knowing What Material Is

Covered by This Course This Year– Oversimplification in Commercial Outlines– Copying Material v. Responding to This

Year’s Qs

Structure of Exam

• Three hours; two equally weighted Qs– One hour to read Qs, take notes, outline

– Two hours to write answers • One hour per Q• Stick to times

• Instructions page of exam will be available on Course Page so you can read it in advance

Using Your Reading Period

• Read each Q carefully at least twice

• List major points you’d like to discuss

• Choose order to make rough outline

• My Recommendation: – Use about half of reading period on

each Q

– Write first the Q you outline last

Aftermath

• By tradition, I’ll be on the bricks at the end of the scheduled exam time

• I’ll post grading progress on Course Page

• Once grades are submitted, I’ll create packets for each of you with:– Your scores on each part of course

– Comments & Model Answers for Exam

Qs on Exam Logistics?

Exam Technique: Generally


• My Exam Techniques Lectures Available on Academic Achievement Website

• Some Repetition Here, But Focused on Problems Commonly Arising on Old Antitrust Exams


(1) Testing Ability to Use Tools, Not Knowledge of Them

• Don’t Simply Recite Legal Tests and History; Apply Them

• Include Reference to Relevant Authority

• Show All Work

• Wizard of Oz (Because, Because, Because)


(2) Draft, Not Final Product • No need for formal introductions &

conclusions

• Use abbreviations (AT; RoR; Mkt Def/Pwr)

• Can use telegraph English

• Use headings, not topic sentences

• Can use bulleted lists (e.g., of evidence supporting one particular mkt def)


(3) Best Prep is Old Exam Qs • Do some under exam conditions

• Review in groups if possible

• Read my comments where available

• Use model answers – to see organization/style I like – to see some possible ways to analyze– neither complete nor perfect


(4) Ask if you don’t know what a word or phrase means

• “Saturday Night Special”

• “Sheet Music”

Qs on General Exam

Techniques

Exam Technique: Question I

Opinion/Dissent


Opinion/Dissent Instructions: Compose drafts of the analysis sections of an opinion and of a shorter dissent for the [US Supreme] Court deciding this question/these questions in the context of the facts of this case.


Compose drafts …• As with issue-spotter, can include

headings, bullet points, abbr., etc.

• Present concise versions of arguments, not rhetoric (don’t get carried away with role)

• Don’t need fancy language, transitions, etc.


… of the analysis sections …• No need for

– Introduction– Statement of facts– Procedural history – Conclusion

• Do make clear which side would win


… of an opinion and of a shorter dissent …

• Point: make best arguments on both sides of issue– caselaw; policy; economic theory – judicial efficiency, stare decisis

• Must be 2 opinions; format/method flexible – can write both simultaneously– can do most of work in long opinion

• Try to deal w other side’s best arguments


… for the [US Supreme] Court …• Can use lower court cases; not bound by

• Don't be afraid to take a stand – Can revisit own cases– Overrule Brown Shoe v. distinguish Brown Shoe

• Awareness that deciding law, not just case in front of you– Must defend positions taken even if status quo– Considerations like market incentives in future


… deciding this question/these questions …

• Narrow Q or Qs– Read Carefully– Look at Old Exam Qs for Examples


The U.S. Supreme Court granted certiorari to decide when, if ever, a boycott should be

judged under the per se rule or using quick look analysis.

• Stay within Boundaries set by Q or Qs– Pick a rule & defend it

– Consider alternatives

– Remember to decide case


The U.S. Supreme Court granted certiorari to decide when, if ever, a boycott should be judged under

the per se rule or using quick look analysis.

• Stay within Boundaries set by Q or Qs– Lawsuit in Q challenged one agreement;

others should not be part of discussion

– Don’t Finesse Q away: • “Result same so no need to decide …”• “Here dfdts would lose even under RoR so

no need to decide …”


• Stay within Boundaries set by Q or Qs; if two questions:– Treat as roughly equal

– Find a way to have arguments on 2 sides of each; can have 2 dissents or a dissent plus a concurrence if it enables you to do this


… deciding this question/these questions …

• Narrow Q or Qs; Read Carefully

• Stay within Boundaries set by Q

• Address arguments made by lower courts– Guiding you to some available arguments– At least have side that rejects say why


…in the context of the facts of this case. (2007 Examples)

• Again read carefully: Many students referred to defendants, who were a group of manufacturers, as “retailers.”



• Again read carefully

• Treat my facts as given; don’t argue w Q. Although question says defendants had market power, several students referred to them as small struggling businesses.



• Again read carefully

• Treat my facts as given

• Think about why facts are there. I chose facts to make as strong a case as possible for per se illegality under NWWS.


…in the context of the facts of this case.

• Can use particular case you’re given as example or as counterexample– “The case before us demonstrates why …”– “We think this case is not typical because …”

Documents

Heinz-Beech Nut Merger THINGS TO FOCUS ON: Significance of Structure and Operation of the Market Key Evidence** (for Exam Q2) – Identify significance of