Transcript Heinz-Beech Nut Merger

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
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 BeechNut 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
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
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 32 or 21
– 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: Effects on
Competition
Heinz-Beech Nut Merger: Likely
Effects on Competition
Three Potential Effects Debated
1. Effects on Competition with Gerber
2. Effects on Innovation
3. 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 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
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 competition 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 competition 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 competition 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
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
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
Heinz-Beech Nut
Merger:
Questions?
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.)
General
Information
Related to the
Exam
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
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
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
Qs on Exam
Logistics?
Exam Technique:
Generally
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”
Qs on General
Exam
Techniques
Exam Technique:
Question I
Opinion/Dissent
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.
Exam Technique: Question I
…in the context of the facts of this
case.
• Can use particular case you’re given as
example or as counterexample
– “The case before us demonstrates why …”
– “We think this case is not typical because …”