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Heinz-Beech Nut Merger

Heinz-Beech Nut Merger

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Heinz-Beech Nut Merger

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  1. 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

  2. Heinz-Beech Nut Merger: Background

  3. Heinz-Beech Nut Merger: Background 2000 Baby Food Market Shares: • Gerber (premium) …………….65% • Heinz (~15% discount)………..17% • Beech-Nut (premium)………...15%

  4. Heinz-Beech Nut Merger: Background 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

  5. Heinz-Beech Nut Merger: Background 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

  6. Heinz-Beech Nut Merger: Significance of Market Structure

  7. Heinz-Beech Nut Merger: Significance of Market Structure FTC Position • Essentially viewed market structure as similar to Staples • 32 in market w very high concentration/ HHI numbers • Significant barriers to entry (BE) • Merger to duopoly in industry w high BE = anti-competitive

  8. Heinz-Beech Nut Merger: Significance of Market Structure FTC Position • Essentially viewed market structure as similar to Staples • Because of market structure: • Merger would yield less competition • Efficiencies shouldn’t matter

  9. Heinz-Beech Nut Merger: Significance of Market Structure 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

  10. Heinz-Beech Nut Merger: Significance of Market Structure 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

  11. Heinz-Beech Nut Merger: Significance of Market Structure 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 32 or 21 • BUT here almost all cities have only 2 brands and would retain 2

  12. Heinz-Beech Nut Merger: Significance of Market Structure 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

  13. Heinz-Beech Nut Merger: Effects on Competition

  14. Heinz-Beech Nut Merger: Likely Effects on Competition Three Potential Effects Debated • Effects on Competition with Gerber • Effects on Innovation • Incentives to Raise Prices Unilaterally

  15. Heinz-Beech Nut Merger: Likely Effects on Competition 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

  16. Heinz-Beech Nut Merger: Likely Effects on Competition 1. Effects on Competition w Gerber Heinz: Would Increase Competition w G • H & BN can’t challenge G dominance b/c hard to expand • Merged Entity Could Compete Better • Collusion with G Unlikely

  17. Heinz-Beech Nut Merger: Likely Effects on Competition • 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

  18. Heinz-Beech Nut Merger: Likely Effects on Competition 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

  19. Heinz-Beech Nut Merger: Likely Effects on Competition 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**

  20. Heinz-Beech Nut Merger: Likely Effects on Competition 2. Effects on Innovation FTC: BN had been innovator, thus merger would reduce innovation in industry

  21. Heinz-Beech Nut Merger: Likely Effects on Competition 2. 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

  22. Heinz-Beech Nut Merger: Likely Effects on Competition 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

  23. Heinz-Beech Nut Merger: Likely Effects on Competition 3. Incentives to Raise Prices Unilaterally 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**)

  24. Heinz-Beech Nut Merger: Likely Effects on Competition 3. Incentives to Raise Prices Unilaterally 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.

  25. Heinz-Beech Nut Merger: Likely Effects on Competition 3. Incentives to Raise Prices Unilaterally 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

  26. Heinz-Beech Nut Merger: Debate re Efficiencies

  27. 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.

  28. Heinz-Beech Nut Merger: Debate re Efficiencies 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**

  29. Heinz-Beech Nut Merger: Debate re Efficiencies • 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)

  30. Heinz-Beech Nut Merger: Concluding Notes re Evidence

  31. 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

  32. Heinz-Beech Nut Merger: Questions?

  33. 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.)

  34. General Information Related to the Exam

  35. 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 Qsuntil 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

  36. 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

  37. 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

  38. 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

  39. 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

  40. 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

  41. 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

  42. Qs on Exam Logistics?

  43. Exam Technique: Generally

  44. 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

  45. Exam Technique: Generally (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)

  46. Exam Technique: Generally (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)

  47. Exam Technique: Generally (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

  48. Exam Technique: Generally (4) Ask if you don’t know what a word or phrase means • “Saturday Night Special” • “Sheet Music”

  49. Qs on General Exam Techniques

  50. Exam Technique: Question IOpinion/Dissent