mergers5

Merger Cases

Issue: What criteria have the courts applied to determine if a merger "substantially lessens competition or tends to create a monopoly"?

Introduction: Theory predicts that a merger lessens competition (or in technical terms, diminishes the total surplus) if it effectively reshapes industry structure. Mergers are not illegal per se, so the inherent effect test mainly involves measuring the combined post merger shares of the consolidating firms (or the post merger concentration ratio) in the relevant market. This is the essence of the so-called structuralist approach to § 7. The obvious defense in a § 7 case is: "We are not rivals; therefore, this merger has no effect on industry structure." Merger cases invariably begin with a careful definition of the relevant product and/or geographic market.

The Problem of Market Definition

Principles of market definition elaborated in the Brown Shoe case (see p. 206 in Economics of Regulation and Antitrust).

The key issue in the Continental Can-Hazel Atlas Glass case [U.S. v. Continental Can et al., 378 U.S. 271,1964] was product market definition--i.e., were metal and glass containers substitutable? If the product market was defined to include both metal and glass containers, the post-merger market share of the consolidated firms increased from 21.9 to 25%. The defendants argued that market should be "narrowly" defined--i.e., glass and metal containers should be kept separate. Citing substantial interproduct competition in soft drinks, beer, and baby food, the Court opted for the "broad" definition and disallowed the merger.

The key issue in the Pabst-Blatz case [U.S. v. Pabst Brewing Company, 384 U.S. 546, 1966] was geographic market definition. The government argued that the geographic market should be restricted to a 3 state region (Michigan, Illinois, and Wisconsin) in which the combined shares of Pabst and Blatz reached 24 percent. Pabst argued the market was national in scope and the merger resulted in a negligible increase in seller concentration (the combined shares of Pabst and Blatz for the "broad" market definition was a mere 5 percent). The merger was enjoined, the Court having settled on the "narrow" geographic market definition.

Both the relevant product and geographic market were at issue in the Tasty Baking v. Ralston Purina Case [Tasty Baking Company and Tastykake, Inc. v. Ralston Purina, Inc., and Continental Baking Co. 653 F. Supp. 1250, E.D. Penn 1987].

	The plaintiffs argued that "snack cakes and pies" constituted an "economically significant submarket." Tasty Baking claimed that the acquisition of Continental Baking (maker of Hostess Twinkies) by Ralston Purina would substantially lessen competition in this market segment since Drake (maker of "Ring Dings") was already a Ralston Purina property. Tasty said the market should include: Drake, Hostess, and Tastykake (the Court added Little Debbie and Dolly Madison to that group).
	Ralston Purina argued the market should be defined broadly enough to include "[f]resh baked shop type goods, cake donuts, candy bars, ice cream. . . with all snacks [including cookies]." An in-house marketing study showed that "Hostess heavy users appear to seek alternative indulgent sweet foods."
	This case is also remarkable for the careful way in which the court specified the relevant geographic markets. Market definition should reflect "commercial realities" and "must be charted by careful selection of the market area in which the seller operates and to which the purchaser can predictably turn for supplies." The court sought to determine geographic overlap of wholesale distribution systems between Drake and Hostess, as well as city or region-specific marketing and pricing policies.
	The geographic markets were defined as: Boston, NY, Philadelphia, Washington, D.C., New England, and the Mid-Atlantic Region. Given the product market definition above, the merger resulted in a substantial increase in the Herfindahl index for all geographic markets (ranging from 197 for Washington, D.C. up to 2369 for New York City).

The Brown Shoe case [Brown Shoe Co. v. U.S. 370 U.S. 294 (1962)]

The Justice Dept. sought an injunction to stop the merger of Brown Shoe and Kinney Shoes in 1955. The merger was allowed with the provision that the companies "be operated separately and their assets be kept separately identifiable." The government subsequently won a § 7 suit in Federal District court. Brown Shoe appealed.

The merger had both horizontal and vertical aspects.

Brown Shoe's main business was shoe manufacturing--a business that could be structurally characterized as "loosely oligopolistic." Brown Shoe was the nation's 4^th largest manufacturer, accounting for 4% of men's, women's, and children's shoes in 1955.

Kinney, though it did make shoes (it was the 12^th largest shoemaker--but with a small market share), was primarily a retailer. It had 400 stores in 270 cities. There were about 70,000 shoe retailers in the U.S. (but only 22,00 that derived more than 50% of revenues from shoe sales and thus could be classified as "shoe stores"). Kinney accounted for a mere 1.2% of national retail shoe sales by dollar volume.

The Court defined three product "submarkets":(1) men's shoes; (2) women shoe's; and (3) children's shoes. Chief Justice Warren: "These product lines are recognized by the public; each line is manufactured in separate plants; each has characteristics peculiar to itself . . . [and] is directed toward a distinct class of customers."

The geographic market was defined as "[c]ities of 10,000 or more in population, and contiguous areas, in which both Brown and Kinney retailed shoes."

Having delineated the relevant market, the Court noted that

	In 7 cities, the combined share of Kinney and Brown Shoe in the women's segment ranged from 33-57%. In 32 cities, the combine share of women's shoe sales exceeded 20 %.
	The combined share of children's shoe sales exceeded 20% in 31 cities.

Issue: What test should be applied to determine if the merger "substantially lessens competition or tends to create a monopoly"? Click here to read the opinion of Justice Warren.

The Supreme Court upheld the District Court ruling--i.e., the merger was illegal under § 7 as amended. Why?

	The post-merger degree of seller concentration was quite high in many instances.
	Merger took place against the backdrop of an industry that was growing more concentrated at both manufacturing and retailing stages--the merger reinforced this trend.
	The merger foreclosed Kinney retail outlets to small, non-integrated shoe manufacturers. The merger contributed to the "definite trend for the parent-manufacturers to supply an ever increasing percentage of the retail outlets' needs, thereby effectively foreclosing other manufacturers from effectively competing for the retail accounts" [Justice Earl Warren].

Warren divined the political intentions of the framers in the final paragraph of the Brown Shoe opinion.

For a brief discussion of the Von's Grocery Case (1966) See Roger Lowenstein," Antitrust Enforcers Drop the Ideology, Focus on Economics," Wall Street Journal, Feb. 27, 1997: A1.

The Proctor & Gamble-Clorox Case [FTC v. Proctor & Gamble, 386 U.S. 568 (1967)].

Issue: Can a conglomerate merger be anti-competitive? Judging from the Clorox decision, the answer is "yes." However, there must be a strong element of horizontal market power involved.

	At the time of the merger in 1957, Clorox was the number one seller of household bleach with a 48.8% share of national sales. Purex was number two with a 15.7% share. Hence, the product market was highly concentrated and featured significant product differentiation and heavy advertising expenditures.
	P & G was the nation's largest advertiser ($127,000,000 in advertising and promotion expense in 1957). It received volume discounts from media outlets, and it routinely featured multiple products (soaps, dishwashing liquid, and detergents) in its sales promotions. Chief Justice Warren noted that : "As a multiproduct producer Proctor enjoys substantial advantages in advertising and sales promotion. Thus, it can and does feature several products in its promotions, reducing the printing, mailing, and other costs of each product. It also purchases network programs on behalf of several products, enabling it to give each product network exposure at a fraction of the cost per product that a firm with only one product to advertise would incur." This factor would create a barrier to entry into the market for bleach--that is, Clorox would have an unfair advantage over current and potential rivals.
	The FTC tested the saliency of the "potential competition" doctrine in this case. That is, P&G was a prime potential entrant into the market for household bleach; hence the merger diminished potential competition.

Back to Lesson 6

ECON 4333 Links

ECON 4333 Page