Nestle-Perrier Merger case study

Introduction 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

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: 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 transparency 3: 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 Prohibition of takeover of Perrier by Nestlé without the transfer of Volvic to BSN [avoid Nestlé having a dominant position (52% market share)] 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 ?