heinz-beech nut merger things to focus on: significance of structure and operation of the market key...
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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
2000 Baby Food Market Shares:
•Gerber (premium) …………….65%•Heinz (~15% discount)
………..17%•Beech-Nut (premium)………...15%
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
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
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
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
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
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
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 32 or 21– BUT here almost all cities have only 2
brands and would retain 2
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
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
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
Heinz-Beech Nut Merger: Likely Effects on Competition
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
Heinz-Beech Nut Merger: Likely Effects on Competition
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
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
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**
Heinz-Beech Nut Merger: Likely Effects on Competition
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
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
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**)
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.
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
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-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**
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)
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
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.)
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
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
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)
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)
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
Exam Technique: Generally
(4) Ask if you don’t know what a word or phrase means
• “Saturday Night Special”
• “Sheet Music”
Exam Technique: Question I
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.
Exam Technique: Question I
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.
Exam Technique: Question I
… of the analysis sections …• No need for
– Introduction– Statement of facts– Procedural history – Conclusion
• Do make clear which side would win
Exam Technique: Question I
… 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
Exam Technique: Question I
… 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
Exam Technique: Question I
… deciding this question/these questions …
• Narrow Q or Qs– Read Carefully– Look at Old Exam Qs for Examples
Exam Technique: Question I
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
Exam Technique: Question I
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 …”
Exam Technique: Question I
• 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
Exam Technique: Question I
… 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
Exam Technique: Question I
…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.”
Exam Technique: Question I
…in the context of the facts of this case. (2007 Examples)
• 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.
Exam Technique: Question I
…in the context of the facts of this case. (2007 Examples)
• 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.