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