NESTLEPERRIER MERGER CASEBackground On February 25, 1992, the Swiss company Nestlé ( active in many sectors of nutrition) notified to EEC Commission a public bid for 100% shares of Perrier SA a French company which is mainly active in the manufacture and distribution of bottled waters, in order to get the authorization foreseen by the Council Regulation No 4064/89 relative to the control of concentrations between enterprises. Article 2 (3) of the Merger Regulation stipulates: A concentration which creates or strengthens a dominant position as a result of which effective competition . would be significantly impeded in the common market or in a substantial part of it shall be declared incompatible with the common market . Which are the affected markets? Relevant product market the relevant product market is that of bottled source water Nestlé has submitted in its notification that there is no separate market for bottled source water, and that the relevant market to asses the proposed concentration should be that of nonalcoholic refreshment beverages , including both bottled source water and soft drinks. Three main factors indicate that it cannot be reasonably expected that an appreciable nontransitory increase in the price of source waters compared with that of soft drinks would lead to a significant shift of demand from source waters to soft drinks for reasons of price only: – Substantial price difference in absolute terms between bottled water and soft drinks (still mineral watersbetween FF 2,49 and 2,56 and soft drinksbetween FF 6,1 and 9,4 – The reduction in real prices of soft drinks contrasts with the evolution of real prices for mineral waters. – Real price correlation among soft drinks marketed by different companies is often positive and relatively high, among different brands of waters ranges between a minimum of 0,85 and1, between each soft drink and bottled water is in most cases negative, or when positive, very low. The third major supplier on the French source water market is BSNWhich are the affected markets? Relevant geographic market the French market. Nestlé has argued that if excessive prices were to be applied in the French market, parallel imports into France would develop. The mere threat of parallel imports would put at risk any dominant position in the French market according to Nestlé. The Commission concludes that the relevant geographic market is France because: • Bottled source water is a relatively inexpensive and bulky merchandise with a high impact of transport costs. It is not likely that a parallel importer could move throughout the various Member States the large volumes required to earn significant revenue and profits. • There are strong barriers to entry into the French market of bottled source water. mineral and spring waters have to be bottled at the source and therefore can be produced only at one specific location. transport cost disadvantage to export to Franceabsence of imports the French market is a mature market in terms of the number of brands and range of products the French water market is characterized by the predominance of brands. The combined advertising budget of the three national French suppliers Nestlé, Perrier and BSN amounted to over FF 680 million in 1991. the high degree of concentration in the French source water market, with three companies holding 82 % of the market share by value, constitutes an additional barrier to entry and increases the risks associated with new entry consumers in general return to the wellknown national brands in the short or medium termCOMPATIBILITY WITH THE COMMON MARKET Market shares NILkindicator of market power Capacities and portfolio of sources distribution of capacities,collusion Cost structures Competition from local water suppliers Buying Power Potential Competition Impact on the maintenance or development of effective competitionMarket shares • The market shares in value terms better reflect the real market strength than the market shares in volume because the French water market is composed of two categories of products which are very different in terms of price the nationally distributed mineral waters and the local waters, which are mainly spring waters (gap between FF 1,24 and 1,30). • The market shares in value provided by Nestl é show that the three national suppliers hold a market share of 82,3% of the total French bottled water market and that the local suppliers have a market share of only 17,7 %. • Market shares (in terms of volume) in French bottled water market at the time of merger Nestlé 17,1% (900 mln liters) Perrier 35,9 % (1.885 mln liters) BSN 23 % (1.207 mln liters) Others 24 % (1.258 mln liters) Total annual volume of French bottled water market 5.25 bln litersEconometric analyze of market power level of oligopolistic equilibrium on the market. Econometric indicators • HerfindahlHirschman Indexindex of concentration, used by antitrust policy of USA, is a measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them.. Decreases in the Herfindahl index generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite. • The new indicator LindaNILk, (indicators of market power on monoduoand oligopolistic markets.)developed by R.Linda, taking into account the new antitrust policy of the Commission and the regulation 4064/89 –and reflect the degree of disequilibrium between the first 2,3,4… enterprises which dominate the market.Econometric indicators I. Herfindahl HHI=(x1. 100)²+(x2.100)²+(x3.100)²= 2306 HHI<1000non concentrated market structure HHI>1800very rated, non authorized merger II. The indicator NILk fC=C3=x1+x2+x3=78% ratio of concentration 2L=x1 / x2 =170% 3L= (x1 / x2+x3 / 2 + x1+x2 / 2 / x3):2= 197% NIL2=(C3. 100)²/10 . 2L=1034 NIL3 =(C3. 100) ²/10 . 3L=1199 French market Cumulative Individual Linda of mineral concentration parts indicators2L, 3L water X1, X2, X3C3 NIL2, NIL3 Perrier 39% BSN 78% 23% 2L=170% NIL2=1034 Nestlé 16% 3L=197% NIL3=1199The indicator NILk NIL3 < 500 : relatively equilibrated oligopolistic structure, probably compatible with European antitrust norms. 500 ≤ NIL3 ≤1000 : relatively disequilibrated and concentrated oligopolistic structure, require the examination of the Commission before to authorize the operation. 1000< NIL3 <3000 : oligopolistic structure very close to duomonopolization, probably incompatible with regulation 4064/89. NIL3 >3000 : oligopolistic structure incompatible with the regulation. This analyze proves the existence of a dominant position (NIL3 >1000), tending to duopolistic structure . Background. Anticipating European Commission’s argument that the merger would create a dominant position for the merging parties, Nestl é and Perrier agreed to transfer Volvic (a major still mineral source of Perrier) to BSN, which would create a balanced duopoly instead of a dominant firm. Nestlé+PerrierVolvic = BSN + Volvic = (2 bln liters) 38% The European Commission tried to expand the scope of EU merger control Not only against single dominance but also against oligopolistic dominance . According to the Commission, “ competition had been weak on the bottled water market even before the merger and it would become even weaker after merger”
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