Nestle-Perrier Merger case study

1. Nestle-Perrier Merger case study

2. Introduction • Both companies are internationallyactive 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

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 morethan 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 fringefirms, 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] • Obligationfor 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?