The document discusses antitrust legislation and merger reviews. It provides information on key factors considered in reviews, including market definition, seller concentration using the Herfindahl-Hirschman Index (HHI), ease of entry, efficiencies, and past collusive behavior. It then summarizes the 1986 case where Coca-Cola proposed acquiring Dr Pepper. The Federal Trade Commission blocked the merger, citing a concentrated market, barriers to entry in the soda industry, and the potential for increased collusive behavior with fewer major competitors.

1. WHEN THE
GOVERNMENT PLAYS
IN THE MARKET
Antitrust Actions

2. Review Markets

3. ANTITRUST LEGISLATION

4. The Problem with few firms
• Interdependent
• Game theory
• Collusion
• Relatively formal but illegal agreement
• Tacit Coordination
• Informal coordination with uncertain legal implications
• Mainly Price Fixing

5. Antitrust Laws
• Sherman Act (1890)
• “…restraint of trade… is declared to be illegal”
• Clayton Act (1914)
• Made illegal:
• price discrimination, exclusive dealing, tying contracts, acquisition of
rival stock, interlocking directorates
• FTC Act (1914)
• Declared “unfair methods of competition” illegal
• Hart-Scott-Rodino (1976)
• Requires government review of all proposed mergers

6. Antitrust Cases
• Vertical Mergers
• Merger among suppliers
and sellers
• Efficiencies
• Capacity constraints
• Horizontal Mergers
• Merger between two
competing firms
• Efficiencies
• Loss of competition

7. Areas of Interest in Review
• Market Definition
• Seller Concentration
• Ease of Entry
• Other Market Characteristics
• Cost Savings and Efficiencies
Mainly looking out for the consumer and society:
Asking what will be the effects on prices, quantity offered
and potential innovation.

8. Notes
Definition FTC Coca Cola
Market Definition
Seller
Concentration
Ease of Entry
Cost Savings/
Efficiencies
Other Market
Characteristics

9. Market Definition
• Asks what are substitutes? And how many are there?
• Narrow vs Broad definition depending on goal
All bottled/canned beverages
Soda

10. Seller Concentration
• Measure of concentration of market share. How close to
monopoly power?
• Measure with Herfindahl-Hirschman Index:
• = Sum (Market share each firm) 2
For example, two equal firms
each half the market
HHI = (50x50) + (50x50) = 5,000

11. Herfindahl-Hirschman Index (HHI)
• Another Example:
• HHI can vary from as low as 200 to a max of 10,000
Firms Market
Share
Squared
Firm A 30% 30 x 30 = 90
Firm B 60% 60 x 60 = 360
Firm C 10% 10 x 10 = 100
HHI 550

12. Herfindahl-Hirschman Index
• If pure monopoly: one firm= 100% of market
• HHI = 100*100 = 10,000
• What if two equal firms,
• HHI = (50*50) + (50*50) = 5000
• What if four equal firms,
• HHI = (25*25) + (25*25) + (25*25) + (25*25) = 2500
• What if 10 equal firms = 1000

13. So What?
• During the 2000s:
• an HHI score of 1,800 or higher was deemed a
concentrated industry, and a merger that increased the
score by more than 100 points.
• Since 2010 Concentrated is above 2,500 and 200.
HHI Assessment Examples
Below 1,000 Unconcentrated Machine shops,
Footwear, Butter,
Milk
1,000-1,800 Moderately
Concentrated
Dog/Cat food,
Chocolate &
candy manuf
Above 1,800 Concentrated Autos, Cereal,
Tobacco

14. Ease of Entry
• If positive economic profits, how easily can new firms
start-up?
• Consider:
• Control of resources
• Distribution channels
• Economies of scale
• Advertising needs
• Past success/fail rates for new entrants

15. Other Market Characteristics
• Will there be savings to the producers that can be passed
along to the consumer?
• Will the greater market mean lower ATC? More efficient?
• Is there evidence of past collusion?
• Maverick firms? 4 min radio clip

16. 1986 COCA-COLA
PROPOSES BUYING
DR PEPPER
FTC v Coca-Cola

17. Carbonated
Soft Drink
Market
Coca-Cola to buy
Dr Pepper
Pepsi to buy
Seven-Up
Producer Share
Coca-Cola 37.4%
Pepsi Co 28.9
Phillip-Morris (7 Up) 5.7
Dr Pepper 4.6
RJ Reynolds (Sunkist, Canada Dry) 3.0
RC Cola 2.9
Procter&Gamble (Orange Crush,
Hines Root Beer) 1.8
Others, generics 15.7

18. Market Definition
Are the firms actually competitors?
FTC
Carbonated Soft Drinks
Coca-Cola
• All potable beverages,
including ice teas, milk,
juice, etc.

19. Seller Concentration
How much of the market do the sellers have?
HHI = Sum of squared market shares
FTC
Carbonated Soft Drinks,
therefore increasing
concentration
Coca-Cola
• All potable beverages,
including ice teas, milk,
juice, etc. and CSD only
25% of the whole market.

20. Soda Seller Concentration
US Retail Sales 1985 With merger
HHI = 2553 HHI = 2897
344 point increase
Producer Share
Coca-Cola 37.4%
Pepsi Co 28.9
Phillip-Morris (7 Up) 5.7
Dr Pepper 4.6
RJ Reynolds (Sunkist,
Canada Dry) 3.0
RC Cola 2.9
Procter&Gamble (Orange
Crush, Hines Root Beer) 1.8
Others, generics 15.7
Producer Share
Coca-Cola –Dr Pepper 42
Pepsi Co 28.9
Phillip-Morris (7 Up) 5.7
RJ Reynolds (Sunkist, Canada
Dry) 3.0
RC Cola 2.9
Procter&Gamble (Orange
Crush, Hines Root Beer) 1.8
Others, generics 15.7

21. Check-in
• If included all potable soft
drinks in market share
calculation what would
happen to the HHI?
• A. Be lower
• B. Stay the same
• C. Go higher

22. Ease of Entry
What barriers to entry exist?
Could market power be challenged?
FTC
- Advertising
“$44mil Cherry Coke” “a sunk cost”
(4x expenditures other food items)
-Access to bottling plants
and distribution
-Access to stores and
vending machines
Coca-Cola
• Just flavor, water and
bottles – no big deal
• Could use beer or dairy
distributors

23. Flavor Restrictions
Minimum 10-20%
market share
Provided access to
grocery shelf space
Limited fountain and
vending machine access
for new brands

24. Other Market Characteristics
Any history of collusive behavior?
Global or innovation challenges that may change market?
Efficiency gains?
FTC
-Fewer players makes
collusion more likely
-Coke had tried and failed to
market a Dr Pepper-like flavor
-Past data showed high and
similar rates of return
Coca-Cola
• Only Pepsi-Coke rivalry
matters and merger
makes it more intense
• Too many different
products to coordinate
price changes

25. THE VERDICT
“The acquisition totally lacks any apparent
redeeming feature”
Or “No”

26. Soda Market
Today
Coca-Cola (42.8 %)
Fuse, Sprite, Minute
Maid, Dasani
Pepsi (31%)
Gatorade, Tropicana
Mtn Dew, Sierra
Mist
Dr Pepper/Snapple
(15%)
Canada Dry,
Welch’s, 7-Up, A&W

27. Case Study: GM and Post Merger
• Each group will get a packet with the article, market share
data and a merger review table. You may want to put a
merger review table in your own notes as well.
• Fill out the table for the proposed merger.
• Use the market share data and the article The Cornflake
Cartel to give evidence for each side and each area of
review.
• Reach a verdict – Will you allow this merger?

28. Cereal
Merger
• In groups evaluate a merger between
Post and General Mills
• Consider:
• Market Definition
• Market Share & HHI
• Barriers to Entry
• Past non-competitive behaviors
• Efficiency Gains
Firm
Market
Share
Kellogs 38 %
General Mills 27
Post 11
Quaker Oats 7
Ralston 5
Nabisco 3
Other (generics) 8