1. Nestle-Perrier Merger case study

2. 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

3. The relevant product market

4. 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

5. Results Low demand side substituability
Low supply side substituability
Small elasticity of demand
Possibility to set high prices
Need for marketing and promotion

6. 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

7. Barriers to entry
highly concentrated market (Nestlé/Perrier/BSN: 82% market shares)
Advertising (sunk) costs
Mature markets
Limited shelve space
Logistic adaptation

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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.

14. The critics of Compte/Jenny/Rey
The Commission‘s solution:
Possibility of tacit collusion!

15. The critic of Compte/Jenny/Rey
The relevance of capacities
the third party has less capacities than Nestlé/BSN
Effective competition?

16. Conclusions Relevance of capacities was underestimated
Today’s situation shows that Compte/Rey/Jenny
were right
Alternatives
A need for reforms ?