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Heinz-Beech Nut Merger. THINGS TO FOCUS ON: Significance of Structure and Operation of the Market Key Evidence** (for Exam Q2) Identify significance of facts Identify missing facts that would aid analysis Headers are Color of Strained Carrots. Heinz-Beech Nut Merger: Background.

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heinz beech nut merger
Heinz-Beech Nut Merger

THINGS TO FOCUS ON:

  • Significance of Structure and Operation of the Market
  • Key Evidence** (for Exam Q2)
    • Identify significance of facts
    • Identify missing facts that would aid analysis
  • Headers are Color of Strained Carrots
heinz beech nut merger background3
Heinz-Beech Nut Merger: Background

2000 Baby Food Market Shares:

  • Gerber (premium) …………….65%
  • Heinz (~15% discount)………..17%
  • Beech-Nut (premium)………...15%
heinz beech nut merger background4
Heinz-Beech Nut Merger: Background

Proposed Merger:

  • Heinz agrees to buy Beech-Nut
  • Would sell both products under Beech-Nut label
  • Claimed would use cost savings to charge Heinz prices for Beech-Nut products
heinz beech nut merger background5
Heinz-Beech Nut Merger: Background

Legal Proceedings:

  • FTC challenges; controversial w/in FTC
    • Investigative staff recommended ag. challenge
    • Commission vote 3-2
  • After trial, District Court upheld merger
  • Reversed by D.C. Circuit
heinz beech nut merger significance of market structure7
Heinz-Beech Nut Merger: Significance of Market Structure

FTC Position

  • Essentially viewed market structure as similar to Staples
    • 32 in market w very high concentration/ HHI numbers
    • Significant barriers to entry (BE)
    • Merger to duopoly in industry w high BE = anti-competitive
heinz beech nut merger significance of market structure8
Heinz-Beech Nut Merger: Significance of Market Structure

FTC Position

  • Essentially viewed market structure as similar to Staples
  • Because of market structure:
    • Merger would yield less competition
    • Efficiencies shouldn’t matter
heinz beech nut merger significance of market structure9
Heinz-Beech Nut Merger: Significance of Market Structure

Heinz Position

  • Structure = Dominant firm + 2 smaller rivals
  • Relative strength of G v. BN/H meant little real competition by either smaller firm
  • Merger pro-competitive b/c
    • H could compete better ag. G if stronger
    • H could lower costs b/c efficiencies
heinz beech nut merger significance of market structure10
Heinz-Beech Nut Merger: Significance of Market Structure

Lots of Evidence Supported Heinz

  • Evidence of G’s Market Power:
    • G is pricing leader
    • G’s prices were rising faster than food in general, but its input costs were not **
    • G is sold everywhere; H & BN are not
    • G doesn’t have to pay fees for shelf space
heinz beech nut merger significance of market structure11
Heinz-Beech Nut Merger: Significance of Market Structure

Lots of Evidence Supported Heinz

  • Evidence of G’s Market Power:
  • Different from Staples re Retail Choices
    • FTC argued merger would remove 1/3 choices for consumers
    • cf. Staples, many cities go 32 or 21
    • BUT here almost all cities have only 2 brands and would retain 2
heinz beech nut merger significance of market structure12
Heinz-Beech Nut Merger: Significance of Market Structure

Conundrum

  • Even if Heinz view of market correct, could simultaneously be true that:
    • Merger allows H to produce more cheaply & compete more effectively ag. G
    • Merger makes collusion between G & H easier and more likely
heinz beech nut merger likely effects on competition
Heinz-Beech Nut Merger: Likely Effects on Competition

Three Potential Effects Debated

  • Effects on Competition with Gerber
  • Effects on Innovation
  • Incentives to Raise Prices Unilaterally
heinz beech nut merger likely effects on competition15
Heinz-Beech Nut Merger: Likely Effects on Competition

1. Effects on Competition w Gerber

  • FTC: Would Lessen Competition w Gerber
    • Pre-Merger, H & BN couldn’t collude w G re price b/c each would lose shelf space to the other if they tried
    • Thus, merger would remove impediment to tacit collusion between Gerber & Heinz
heinz beech nut merger likely effects on competition16
Heinz-Beech Nut Merger: Likely Effects on Competition

1. Effects on Competition w Gerber

Heinz: Would Increase Competition w G

  • H & BN can’t challenge G dominance b/c hard to expand
  • Merged Entity Could Compete Better
  • Collusion with G Unlikely
heinz beech nut merger likely effects on competition17
Heinz-Beech Nut Merger: Likely Effects on Competition
  • H & BN can’t challenge G dominance b/c hard to expand
    • Difficult to get new grocery stores to carry; won’t replace G, only each other
      • Would have to outbid rival for shelf space
      • Would have to pay grocers costs of change (restocking; alienation of old customers)
    • Expensive to distribute & promote in area w/o minimal level of sales
heinz beech nut merger likely effects on competition18
Heinz-Beech Nut Merger: Likely Effects on Competition

b. Merged Entity Could Compete Better with G

  • Combine H cheap production w BN premium reputation
  • Efficiencies would lower costs; aid competition
  • Would increase wholesale competition w G, which might then have to bid for shelf space
heinz beech nut merger likely effects on competition19
Heinz-Beech Nut Merger: Likely Effects on Competition

c. Collusion with G Unlikely

  • Hard to coordinate prices; time lag for awareness of wholesale price changes
  • H better off lowering price & increasing market share than colluding
  • G internal documents predict more competition from merged entity, not tacit collusion**
heinz beech nut merger likely effects on competition20
Heinz-Beech Nut Merger: Likely Effects on Competition

2. Effects on Innovation

FTC: BN had been innovator, thus merger would reduce innovation in industry

heinz beech nut merger likely effects on competition21
Heinz-Beech Nut Merger: Likely Effects on Competition

2. Effects on Innovation

Heinz: Little Pre-merger Innovation in Market

  • G little incentive to innovate; would cannibalize own sales
  • Innovation not good investment for BN & H
    • Low market shares = less sales to spread costs over
    • H didn’t want to do national campaign to introduce new products where only in 45% of stores
    • H concluded pre-merger that not profitable to bring to US market 2 major innovations **
  • Access to 85% of grocery shelves will provide merged firm with more incentive to innovate
heinz beech nut merger likely effects on competition22
Heinz-Beech Nut Merger: Likely Effects on Competition

3. Incentives to Raise Prices Unilaterally

  • FTC argues loss of a major competitor will allow H to raise its prices.
  • Heinz & BN argued head to head compe-tition was not restraining their prices
  • Greatly conflicting evidence
heinz beech nut merger likely effects on competition23
Heinz-Beech Nut Merger: Likely Effects on Competition

3. Incentives to Raise Prices Unilaterally

FTC argues loss of a major competitor will allow H to raise its prices. Supported by grocer testimony:**

  • Some retail competition between BN & H would be eliminated
  • When both in market, tended to depress prices of BN/H & of G
  • Threat to switch between BN & H sometimes associated w retail price competition (also supported by BN & H internal documents**)
heinz beech nut merger likely effects on competition24
Heinz-Beech Nut Merger: Likely Effects on Competition

3. Incentives to Raise Prices Unilaterally

Heinz & BN argued head to head compe-tition was not restraining their prices

  • Internal & grocer evidence that they both priced against G and not each other.
  • Study suggested very low cross-elasticity between H & BN; much more with G.**
    • Done w shelf prices, not discounted prices (coupons)
    • Parties contested significance of this.
heinz beech nut merger likely effects on competition25
Heinz-Beech Nut Merger: Likely Effects on Competition

3. Incentives to Raise Prices Unilaterally

Heinz & BN argued head to head compe-tition was not restraining their prices

  • 2d Study**: No significant price difference between:
    • Cities where both BN & H available
    • Cities where both available
    • Cf. Staples
heinz beech nut merger debate re efficiencies27
Heinz-Beech Nut Merger: Debate re Efficiencies

FTC: B/c market so concentrated, efficiencies would need to be extraordinary; not true here.

  • Could have been achieved w/o merger
    • More investment in brand reputation by H
    • Plant modernization by BN
    • Sale of BN to other buyer
  • Insufficient in magnitude to outweigh likely harm to competition.
heinz beech nut merger debate re efficiencies28
Heinz-Beech Nut Merger: Debate re Efficiencies

Heinz: Efficiencies will Reduce Prices

  • Could consolidate production in more efficient Heinz factory; expert: “extraordinary” savings**
  • Could use Heinz multi-product regional distribution centers (big scale economies).
  • Evidence: demand elastic enough so H profits more by lowering prices than by colluding
    • H own experience: passed on savings re other products like cat food and ketchup**
    • Econometric studies/simulation studies suggested pass-thru profitable for H**
heinz beech nut merger debate re efficiencies29
Heinz-Beech Nut Merger: Debate re Efficiencies
  • District Court accepted Heinz efficiencies arguments
  • D.C. Cir. said not strong enough evidence
    • Questioned accounting of cost evidence
    • Insufficient finding that H couldn’t achieve same efficiencies through other means
  • Note importance of presumptions/burden of proof on complex issue(e.g., whether efficiencies could have been achieved w/o merger)
heinz beech nut merger concluding notes re evidence31
Heinz-Beech Nut Merger: Concluding Notes re Evidence
  • Use of Internal Files of H, BN & Gerber
  • Difficulties with Major Types of Evidence:
    • Economic Studies: Need to Understand Assumptions & Methodology
    • Grocer Testimony: Impressions Could be Wrong or Atypical (cf. Aspen)
    • Helpful to Have Both Where Possible
closing up the class
Closing Up the Class (!)
  • General Info on Exam & What I’m Looking For on Each Question Type (Today  Tuesday)
  • Review of Spring 2008 Exam (Tues.)
  • Closing Argument (Tues.)
my availability
My Availability
  • Office Hours: Listed on Course Page
  • I Will respond to
    • Typed answers to old exam questions if you
      • Transmit by Sat 12/13 @ midnight
      • Follow directions on Course Page
    • E-mail & Phone Qsuntil 6pm on day before exam
  • Review session on 12/14:
    • 7 pm; Room TBA
    • I’ll do a little bit of substance, then take Qs
    • Will be taped
exam coverage
Exam Coverage
  • Substantive Law from Units I, II, III
    • Except Vertical Restraints & Predatory Pricing
    • Includes Review Problems except vertical parts of Toys R Us
  • You won’t be asked to analyze vertical restraints, mergers or predatory pricing
    • Can refer to cases covering those topics if helpful
    • Market & competition analyses in AR case studies particularly useful
  • Note: I can’t cover every major issue in the course in two questions
exam open book
Exam = Open Book
  • You can bring anything that doesn’t talk and isn’t programmable
  • You should bring course materials & AR book; I sometimes reference on test
  • Useful to prepare and bring checklists:
    • Qs to consider for particular legal issues
    • Cases from different units that address same issue
      • e.g., market power
      • e.g., claims re non-economic interests
dangers of open book tests
Dangers of Open Book Tests
  • Under-Studying/Over-Reliance on Outline
    • Insufficient time to look up material
    • Use outline as security blanket or for checklists
  • Reliance on commercial sources; old outlines; old model answers
    • Responsible for Knowing What Material Is Covered by This Course This Year
    • Oversimplification in Commercial Outlines
    • Copying Material v. Responding to This Year’s Qs
structure of exam
Structure of Exam
  • Three hours; two equally weighted Qs
    • One hour to read Qs, take notes, outline
    • Two hours to write answers
      • One hour per Q
      • Stick to times
  • Instructions page of exam will be available on Course Page so you can read it in advance
using your reading period
Using Your Reading Period
  • Read each Q carefully at least twice
  • List major points you’d like to discuss
  • Choose order to make rough outline
  • My Recommendation:
    • Use about half of reading period on each Q
    • Write first the Q you outline last
aftermath
Aftermath
  • By tradition, I’ll be on the bricks at the end of the scheduled exam time
  • I’ll post grading progress on Course Page
  • Once grades are submitted, I’ll create packets for each of you with:
    • Your scores on each part of course
    • Comments & Model Answers for Exam
exam technique generally44
Exam Technique: Generally
  • My Exam Techniques Lectures Available on Academic Achievement Website
  • Some Repetition Here, But Focused on Problems Commonly Arising on Old Antitrust Exams
exam technique generally45
Exam Technique: Generally

(1) Testing Ability to Use Tools, Not Knowledge of Them

  • Don’t Simply Recite Legal Tests and History; Apply Them
  • Include Reference to Relevant Authority
  • Show All Work
  • Wizard of Oz (Because, Because, Because)
exam technique generally46
Exam Technique: Generally

(2) Draft, Not Final Product

  • No need for formal introductions & conclusions
  • Use abbreviations (AT; RoR; Mkt Def/Pwr)
  • Can use telegraph English
  • Use headings, not topic sentences
  • Can use bulleted lists (e.g., of evidence supporting one particular mkt def)
exam technique generally47
Exam Technique: Generally

(3) Best Prep is Old Exam Qs

  • Do some under exam conditions
  • Review in groups if possible
  • Read my comments where available
  • Use model answers
    • to see organization/style I like
    • to see some possible ways to analyze
    • neither complete nor perfect
exam technique generally48
Exam Technique: Generally

(4) Ask if you don’t know what a word or phrase means

  • “Saturday Night Special”
  • “Sheet Music”
exam technique question i
Exam Technique: Question I

Opinion/Dissent Instructions: Compose drafts of the analysis sections of an opinion and of a shorter dissent for the [US Supreme] Courtdeciding this question/these questionsin the context of the facts of this case.

exam technique question i52
Exam Technique: Question I

Composedrafts …

  • As with issue-spotter, can include headings, bullet points, abbr., etc.
  • Present concise versions of arguments, not rhetoric (don’t get carried away with role)
  • Don’t need fancy language, transitions, etc.
exam technique question i53
Exam Technique: Question I

… of theanalysis sections …

  • No need for
    • Introduction
    • Statement of facts
    • Procedural history
    • Conclusion
  • Do make clear which side would win
exam technique question i54
Exam Technique: Question I

… of an opinion and of a shorter dissent …

  • Point: make best arguments on both sides of issue
    • caselaw; policy; economic theory
    • judicial efficiency, stare decisis
  • Must be 2 opinions; format/method flexible
    • can write both simultaneously
    • can do most of work in long opinion
  • Try to deal w other side’s best arguments
exam technique question i55
Exam Technique: Question I

… forthe [US Supreme] Court …

  • Can use lower court cases; not bound by
  • Don't be afraid to take a stand
    • Can revisit own cases
    • Overrule Brown Shoe v. distinguish Brown Shoe
  • Awareness that deciding law, not just case in front of you
    • Must defend positions taken even if status quo
    • Considerations like market incentives in future
exam technique question i56
Exam Technique: Question I

… deciding this question/these questions …

  • Narrow Q or Qs
    • Read Carefully
    • Look at Old Exam Qs for Examples
exam technique question i57
Exam Technique: Question I

The U.S. Supreme Court granted certiorari to decide when, if ever, a boycott should be judged under the per se rule or using quick look analysis.

  • Stay within Boundaries set by Q or Qs
    • Pick a rule & defend it
    • Consider alternatives
    • Remember to decide case
exam technique question i58
Exam Technique: Question I

The U.S. Supreme Court granted certiorari to decide when, if ever, a boycott should be judged under the per se rule or using quick look analysis.

  • Stay within Boundaries set by Q or Qs
    • Lawsuit in Q challenged one agreement; others should not be part of discussion
    • Don’t Finesse Q away:
      • “Result same so no need to decide …”
      • “Here dfdts would lose even under RoR so no need to decide …”
exam technique question i59
Exam Technique: Question I
  • Stay within Boundaries set by Q or Qs; if two questions:
    • Treat as roughly equal
    • Find a way to have arguments on 2 sides of each; can have 2 dissents or a dissent plus a concurrence if it enables you to do this
exam technique question i60
Exam Technique: Question I

… deciding this question/these questions …

  • Narrow Q or Qs; Read Carefully
  • Stay within Boundaries set by Q
  • Address arguments made by lower courts
    • Guiding you to some available arguments
    • At least have side that rejects say why
exam technique question i61
Exam Technique: Question I

…in the context of the facts of this case. (2007 Examples)

  • Again read carefully: Many students referred to defendants, who were a group of manufacturers, as “retailers.”
exam technique question i62
Exam Technique: Question I

…in the context of the facts of this case. (2007 Examples)

  • Again read carefully
  • Treat my facts as given; don’t argue w Q. Although question says defendants had market power, several students referred to them as small struggling businesses.
exam technique question i63
Exam Technique: Question I

…in the context of the facts of this case. (2007 Examples)

  • Again read carefully
  • Treat my facts as given
  • Think about why facts are there. I chose facts to make as strong a case as possible for per se illegality under NWWS.
exam technique question i64
Exam Technique: Question I

…in the context of the facts of this case.

  • Can use particular case you’re given as example or as counterexample
    • “The case before us demonstrates why …”
    • “We think this case is not typical because …”