Nestle-Perrier

Merger case study

Introduction

17%

35%24%

24%

Both companies are internationally active in the nutrition sector

February 1992: Nestlé notified

a public bid for 100% of the

shares of Perrier

Merger could lead to a

dominant position for Nestlé

The relevant product market

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sou rce w ate r

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Distinction made by the Commission

Source water Characteristics Soft drink

Clean, pure, natural Taste Sweet, refreshing

Source water, minerals CompositionAdditions of flavour,

sugar

Large, daily use Quantities Small, occasionally

Fulfill basic needIntend 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: - limited number of firms and a high 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 prices 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)- market transparency3: missing competitive constraints: - no imports, no fringe firms, no retail buying power,- high barriers to entry, price inelastic demand

Collusion

The 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) Prohibition 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

Commission 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 need for reforms ?