Nestle-Perrier Merger case study

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12 Νοε 2013 (πριν από 4 χρόνια και 1 μήνα)

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Nestle
-
Perrier

Merger case study

Introduction

17%
35%
24%
24%
B
oth

companies are

internationally

active in the nutrition sector

February

1992
:

Nestlé

notified


a

public

bid

for

100
%

of

the


shares

of

Perrier




M
erger

could

lead

to

a



dominant

position

for

Nestlé

The relevant product market

sparkling
still
purified tap water
sparkling
still
mineral water
still
sparkling
spring water
source water
bottled water
soft drinks
non-alcoholic refreshment beverages
Distinction made by the
Commission

Source water

Characteristics

Soft drink

Clean, pure, natural

Taste

Sweet, refreshing

Source water, minerals

Composition

Additions of flavour,
sugar

Large, daily use

Quantities

Small, occasionally

Fulfill basic need


Intend to use

Satisfy a particular
taste pleasure

mid range

Price

High

Spring/source

Location of production

Everywhere

Results

Low demand side substituability

Low supply side substituability


Small elasticity of demand

Possibility to set high prices

Need for marketing and promotion



The relevant geographic market

Transport costs

-
Water can only be only bottled at source

-
Water: low value


high volume product

-
10% cost addition for a distance of 300 km +
glass bottles even more expensive


Imports are not competitive


The relevant product market is France

Barriers to entry


-
highly concentrated market
(Nestlé/Perrier/BSN: 82% market shares)

-
Advertising (sunk) costs

-
Mature markets

-
Limited shelve space

-
Logistic adaptation

Oligopolistic dominance


Oligopoly:

-
l
imited number of firms and a hig
h
number
of buyers

-
inefficient because it leads to a price level,
which is higher than the competitive price
(marginal costs)

-
strategic interactions


Dominant position vs.

balanced duopoly

Nestlé:

-
would have a market share of more

than 50%

-
company proposed to sell a major source of Perrier

(Volvic) to its competitor BSN



Nestlé and BSN:

-
similar capacities

-
similar market shares (i.e. 38%)

-
90 % of all still water supply


Single firm dominance vs.
Oligopolistic dominace

Merger regulation:

-
prohibition of mergers that could create/strengthen


single firm dominance



Commission argued:


-
scope of the merger regulation should be enlarged
to oligopolistic dominance
:

-
1.
weakened competition between the oligopolists

-
2: which is
likely to be further weakened by a
significant increase in concentration
and

-
3.
in which there is no sufficient price constraining
competition coming from outside the oligopoly


Characteristics of oligopolistic
dominance for Nestlé/BSN

1
:

-

parallelisms

of

prices

over

a

longer

period



-

high

production
-
cost

margin


-

large

gap

between

ex
-
works

price
s


2
:

anticompetitive

parallel

behaviour
/
collective

abuses


-
similar

sizes

and

natures

-
neither

one

could

gain

a

significant

cost

advantage

-
(
technology

&

R&D

played

no

major

role
)

-
m
arket

transparency

3
:

missing

competitive

constraints
:


-
no

imports
,

no

fringe

firms
,

no

retail

buying

power
,

-
high

barriers

to

entry
,

price

inelastic

demand

Collusion

T
he

cooperation

between

companies

in

terms

of

prices

or

quantities

produced,

etc
.

in

order

to

maximize

their

profits
.

-
explicit,

implicit/tacit


-
dynamic

model

of

repeated

interaction

(repeated

game

theory)

can

explain

collusive

behaviour


Nestlé

and

BSN
:



-
Could

tacitly

agree

to

sustain

a

high

price

level

and

the

present

level

of

quantities

produced

in

order

to

maximise

their

profits

Final decison of the Commission

a)
Prohibition

of

takeover

of

Perrier

by

Nestlé

without

the

transfer

of

Volvic

to

BSN

[
avoid

Nestlé

having

a

dominant

position

(
52
%

market

share)
]


b)
P
rohibit
ion

of

the

merger

between

the

firms

with

the

transfer

of

Volvic

to

BSN

[
avoid

the

strengthening

of

an

oligopolistic

dominance
]


Obligation

for

Nestlé

to

sell

sources

(Saint

Yorre,

Vichy,

Pierval,

Thonon,

and

others),

namely

3

billion

litres

of

water

capacity

when

taking

over

Perrier


C
ommission

created

an

asymmetric

oligopoly

and

hoped

to

avoid

tacit

collusion

and

its

negative

impact

on

consumer

welfare
.


The critics of Compte/Jenny/Rey

The Commission‘s solution:


Possibility of tacit collusion!

The critic of Compte/Jenny/Rey

The relevance of capacities

-
the third party has less capacities than
Nestlé/BSN

-
Effective competition?



Conclusions



Relevance of capacities was underestimated


Today’s situation shows that Compte/Rey/Jenny


were right


Alternatives


A n
eed for reforms

?