Efficiency Presentation
–FTC v. Heinz
Efficiencies in the U.S. Merger
Guidelines
• “[A] primary benefit of mergers to the economy is their
potential to generate significant efficiencies and thus enhance
the merged firm’s ability and incentive to compete, which may
result in lower prices, improved quality, enhanced service, or
new products.”
• “[M]erger-generated efficiencies may enhance competition by
permitting two ineffective competitors to form a more
effective competitor, e.g., by combining complementary
assets.”
• “In a unilateral effects context, incremental cost reductions
may reduce or reverse any increases in the merged firm’s
incentive to elevate price.”
• “In a coordinated effects context, incremental cost reductions
may make coordination less likely or effective by enhancing
the incentive of a maverick to lower price or by creating a new
maverick firm.”
Efficiencies Must Be Merger Specific
• “The Agencies credit only those efficiencies
likely to be accomplished with the proposed
merger and unlikely to be accomplished in the
absence of either the proposed merger or
another means having comparable
anticompetitive effects.”
• “Only alternatives that are practical in the
business situation faced by the merging firms
are considered in making this determination.”
Efficiencies Must Be Verifiable
• “[I]t is incumbent upon the merging firms to
substantiate efficiency claims so that the
Agencies can verify by reasonable means the
likelihood and magnitude of each asserted
efficiency.”
Cognizable Efficiencies
• “Cognizable efficiencies are merger-specific
efficiencies that have been verified and do not
arise from anticompetitive reductions in output
or service.”
Efficiencies vs. Competitive Effects
• “The Agencies will not challenge a merger if
cognizable efficiencies are of a character and
magnitude such that the merger is not likely to be
anticompetitive in any relevant market.”
• “To make the requisite determination, the Agencies
consider whether cognizable efficiencies likely would
be sufficient to reverse the merger’s potential to harm
customers in the relevant market, e.g., by preventing
price increases in that market.”
• “[E]fficiencies are most likely to make a difference in
merger analysis when the likely adverse competitive
effects, absent the efficiencies, are not great.”
First Consider the Competitive Effects
Without Efficiencies
• How did Heinz argue that competitive effects
were small?
Heinz and Beech-Nut do not
Constrain Consumer Prices
FTC assertion: “ ... retail pricing is affected
by competition at the wholesale level.”
Heinz and Beech-Nut: “ ... wholesale competition
between Beech-Nut and Heinz does little to affect
retail prices, so the loss of that competition would
not make much difference to the price charged
at retail by the merged firm.”
HHI Calculations Overstate
Merger’s Impact
• Ignore historic Gerber dominance and
price leadership
• Ignore Heinz and Beech-Nut’s lack of national
distribution and geographic overlap
• Ignore market realities – lack of store shelf overlap
• Ignore decline in category
• Ignore lack of consumer substitution at retail
Pricing and Competition
• Limited consumer substitution at retail
• Distribution (get on-the-shelf) competition between
Heinz and Beech-Nut has little effect on consumer
prices
• Heinz and Beech-Nut target Gerber, not each other
• Trade spending occurs in all accounts
• Bidding involves “fixed” up front payments,
depletes consumer funds
• Incremental “fixed” payments do not affect retail
prices
DX 1605
Limited Consumer Substitution at Retail
• Lack of national distribution, geographic overlap
• Lack of in-store competition, shelf space overlap
• Different brand appeal, product niches
• Low cross elasticities
DX 1606
Heinz and Beech-Nut Pricing
Core versus Mixed Markets
Heinz and Beech-Nut Pricing
Core versus Mixed Markets
Source: DX 612
Economic Expert Testimony
– Professor Baker: “[C]onsumer substitution
between Heinz and Beech-Nut is very small
and, therefore, … these two firms are not
constraining each other’s pricing at the retail
level very much.”
FTC Expert Testimony: Heinz and BeechNut Price Against Gerber, Not Each Other
Q: “There’s nothing in [DX 48] about a targeted
differential versus Beech-Nut, is there?
A: “No. Generally Heinz targets off of Gerber.”
Q: “... The objective is solidify Heinz baby food’s
position as an every day brand alternative to
Gerber. Not to Beech-Nut; is that right?”
A: “That’s right.”
Incremental “Fixed” Up Front Payments
Deplete Consumer Funds
 “Bid situations generally result in higher
fixed spending . . . .” Meader Tr. at 816
Incremental Payments do not Change
Retail - Consumer Prices
Retailer’s View
Supermarket Executive:
Q: “So to the extent that you can use funds that you
receive from manufacturers to keep the prices low,
you have a rational incentive to do that, don’t you?”
A: “Yes. We also want some of it to stick to our fingers
so we can show a profit for our investors.”
“[Supermarket] was from the beginning focused on upfront dollars to be used
to pay down their acquisition debt.”
Incremental Payments do not Change
Retail - Consumer Prices
Retailer’s View
Supermarket Executive
Q: “... [W]hat did [Supermarket] do with that money
provided by Beech-Nut?”
A: “We took that money as income.”
Q: “Did [Supermarket] use any of the money ... to lower
its prices on baby food?”
A: “No.”
Gerber U.S. Strategy
7,000
$49,000
$48,000
6,000
$47,000
Volume Sales
Baby Food Category
Growth Plan
$45,000
4,000
$44,000
$43,000
3,000
$42,000
2,000
$41,000
$40,000
February 2000
1,000
$39,000
Category Volume Sales
•
Gerber Volume Sales
Jan 16, 2000
Nov 21, 1999
Sep 26, 1999
Aug 1, 1999
Jun 6, 1999
Apr 11, 1999
Feb 14, 1999
Dec 20, 1998
Oct 25, 1998
Aug 30, 1998
Jul 5, 1998
May 10, 1998
Mar 15, 1998
Jan 18, 1998
Nov 23, 1997
Sep 28, 1997
Aug 3, 1997
Jun 8, 1997
Apr 13, 1997
Feb 16, 1997
$38,000
Dec 22, 1996
0
Gerber Dollar Sales
As category volume has declined, Gerber dollar sales have steadily increased
Dollar Sales
$46,000
5,000
Declining ACV
Bill Johnson
“We have not been able to build distribution. Our
distribution has actually declined over the years.”
* * * *
“[T]he reality at this is that our distribution has
eroded over the years.”
Tracy Quinn
“[Heinz’s] business has declined in distribution. …
As has Beech-Nut’s. My ACV is down as far
as theirs.”
Heinz Post Merger Plan
• Heinz committed to baby food, with the number one position
in several markets around the world
• Shut down the Beech Nut facility and increase utilization at
the Heinz manufacturing facility
– Results in substantial reduction in the cost of manufacturing Beech Nut
baby food
•
•
•
•
•
Heinz would pick the best recipes
Label its baby food Beech Nut everywhere
Charge the lower Heinz value price everywhere
Combination results in a strong national brand
Can launch new products as a result of national presence
Source: DX 2
DX 1656
DX 1657
Efficiencies- Expert Analysis
Q: “As a result of all the work you have done, what is your
opinion regarding the manufacturing cost savings that
may be achieved by this merger?”
A: “I believe the variable manufacturing cost savings that
will be achieved as a result of this merger under the
assumptions that are incorporated in Mr. Campbell’s
analysis, that is, that they would move the production
over to the Pittsburgh facility primarily, that’s what
gives rise to most of it, are substantial, significant.
And they are among the largest that I have ever seen
certainly in a manufacturing segment.”
DX 1669
Cost Reduction
–Resulted in a cost reduction of
22.3% of Beech Nut variable
manufacturing cost
Unilateral Effects
Determining Efficiencies
• Model project price increase without
efficiencies
– Consider UPP model in the Merger Guidelines
• Model the downward pressure on price
– Even a monopolist will lower price if its costs fall
• Does the reduction in costs reverse the price
increase?
Coordinated Effects:
Determining Efficiencies
• Model the price increase without efficiencies
– Monopoly pricing?
– Cournot pricing?
– Bertrand pricing?
• Model the downward pressure on price
Welfare Effects of a Merger That Reduces Cost and Increases Price
Production efficiency gain
Wealth transfer from buyers
to sellers
Allocative efficiency
loss
P1
P0
MC0
Industry
Demand
MC1
Q1
Q0
The Court of Appeals on Heinz
Efficiencies
• Cost reduction not merger specific:
– “[T]he question is how much Heinz would have to
spend to make its product equivalent to the BeechNut product and hence whether Heinz could
achieve the efficiencies of merger without
eliminating Beech-Nut as a competitor. The district
court, however, undertook no inquiry in this
regard.”