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The Implications of Concentration in the Dairy Industry. Chris Hardee Attorney Litigation 1 Section Antitrust Division United States Department of Justice (The views expressed herein are not purported to reflect those of the U.S. Department of Justice). Introduction.

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The Implications of Concentration in the Dairy Industry

Chris Hardee


Litigation 1 Section

Antitrust Division

United States Department of Justice

(The views expressed herein are not purported to reflect those

of the U.S. Department of Justice)

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An Overview of Antitrust Analysis

Three Milk Matters


Southern Belle


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Antitrust analysis

  • Merger Analysis Under The Clayton Act

    • Clayton Act prohibits mergers where the effect “may lead to a substantial lessening of competition”

    • The touchstone is creation or enhancement of buyer or seller “market power”

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“Market power”

  • The ability of one or more firms to maintain prices above competitive levels for a significant period of time

  • Can also be power to keep prices of inputs such as raw milk below competitive levels

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Is “market power” enhanced?

  • Define relevant product and geographic markets to determine who competes

    • Relevant markets are defined by whether a monopolist seller in those markets could profitably impose a small but significant non-transitory increase in price (“SSNIP”)

  • Assess the change in concentration and potential competitive effects in those markets

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Competitive effects

  • “Unilateral effects”

    • Mergers to monopoly/monopsony

    • Elimination of closest competitors

  • “Coordinated effects”

    • Mergers that facilitate cooperation among remaining firms in the market

    • History of bid-rigging in concentrated school milk markets makes this a potential concern

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The Sherman Act

  • Section 1

    • Prohibits agreements in restraint of trade

    • “Per se” illegal agreements are prosecuted criminally (price-fixing, market allocations)

    • “Rule of reason” analysis looks to effects in a relevant market

  • Section 2

    • Prohibits monopolization or attempted monopolization in a relevant market

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  • 2001 merger of nation’s largest dairy processors

  • Concerns in fluid milk processing, school milk and soy milk

  • Approved by DOJ subject to the divestiture of 11 processing plants in 9 states

  • Plants divested to National Dairy Holdings, 50% owned by DFA

  • Subject to modifications in DFA/Suiza milk supply agreements in divestiture markets to satisfy concerns about DFA relationships facilitating coordination between Dean and NDH

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Suiza/Dean fluid milk markets

  • Fluid milk a distinct product market

    • Consumers will not switch to other products to defeat a 5% price increase (low “elasticity”)

  • Geographic markets defined as metropolitan areas

    • Sellers can charge different prices to groups of customers in different regions

  • Unilateral anticompetitive effects in 22 markets

    • Suiza and Dean closest competitors

    • Vertically integrated supermarkets not a sufficient constraint

    • Post-merger shares of 43% to 100%

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Suiza/Dean school milk markets

  • School milk a distinct product market

    • Frequent delivery of milk in half-pints

    • USDA requirements that schools serve milk

  • School districts are geographic markets

    • Suppliers bid separately for contracts and bids reflect differences in competition and costs in each district

  • Unilateral and coordinated effects

    • Mergers to monopoly and elimination of next-closest competitors

    • History of bid-rigging in concentrated school milk markets makes coordinated interaction a serious concern

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Suiza/Dean soy milk market

  • Post-merger market share of 90%

  • No challenge due to

    • Rapid growth of the market

    • Recent large-scale entry

    • Lack of evidence of the post-merger firm’s ability to raise price

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Southern Belle

  • 2002 acquisition by DFA of 50% of Southern Belle dairy in KY along with Robert Allen (the other 50% owner)

  • Southern Belle and DFA’s 50%-owned NDH are the only competitors for many school districts in KY and TN (nearly 100 2-to-1’s and 3-to-2’s)

  • Markets with a history of bid-rigging, including between Southern Belle and NDH’s Flav-O-Rich dairy under prior ownership

  • Judgment in favor of DFA in August 2004. On appeal.

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Southern Belle allegations

  • Combining Southern Belle and NDN would be a clear-cut Clayton Act violation

    • Mergers to monopoly or duopoly in nearly 100 school districts

  • DFA’s 50% overlapping ownership reduces incentives of affiliate dairies to compete

    • Reduced competition will increase profits

    • DFA does not benefit from one affiliate stealing another affiliate’s customers and lowering market prices

    • DFA relationships with its partners and affiliates makes it likely that its affiliates will act to maximize DFA profits

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  • 2002 merger of NDH and Hood

  • DFA would have obtained raw milk supply to Hood and control over milk procurement

  • DOJ and states expressed raw milk concerns

  • Deal restructured in 2002 to eliminate DFA supply rights, control over supply, and limited to sale of NDH Crowley and Marigold plants

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NDH/Hood raw milk concerns

  • Hood the main customer for the last large non-DFA-affiliated coop in New England

  • DFA control over Hood’s supply could have forced the coop to join DFA or a DFA-controlled marketing agency to maintain Class I access

  • Potential monopolization of the sale and purchase of raw milk in New England

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Raw milk concentration

  • Why is DOJ concerned given Capper-Volstead immunity for producers?

    • Producer-processor agreements that affect the raw milk market are not immune

    • Foreclosure of Class I access may lead to increased coop concentration that otherwise would not occur

  • Why would processors participate in agreements that facilitate raw milk cartelization?

  • Competitive raw milk supply is important to

    • Competition in the sale of raw milk

    • Competition in the purchase of raw milk

    • Competition among processors