Friesland Foods / Campina - competition economics

Friesland Foods / Campina ACE conference Berlin

Matthijs Visser [email protected]

7 January, 2010

Friesland Foods / Campina

1. Brief overview of the case 2. The Commission’s theories of harm  Raw milk  Long Life Dairy Drinks 3. The Commission’s econometrics

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Brief overview of the case

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Friesland Foods / Campina – Brief overview of the case 

Merger of the two main producers of dairy products in the Netherlands. Both are vertically integrated cooperatives

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Large number of affected relevant markets (>25)

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Significant overlaps on most markets, competition concerns in many markets

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Main overlaps in consumer products in the Netherlands

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Time pressure

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Evident at early stages of the case that remedies would have to be offered

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Commission engaged in own (econometric) assessments based on scanner data

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The Commission’s theories of harm

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Friesland Foods / Campina – The Commission’s theories of harm 

Raw milk – Merged entity considered to be dominant on procurement market (but what changes really?) – No buyer power issue (too low prices for farmers) considering cooperative nature of the merged entity – However, Commission did identify potential foreclosure issue based on following virtuous circle: (a) merger would lead to market power downstream, (b) prices to retailers go up (c) this allows merged entity to offer higher prices to farmers, (d) more farmers join merged entity, (e) rivals foreclosed of input, etc.

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Friesland Foods / Campina – The Commission’s theories of harm 

Raises some issues also in relation to remedy which go beyond securing (short term) security of input for divestments: – If Commission prevents downstream market power, is there an issue? – If prices to retailers go up, demand decreases, so why would you want additional farmers to join? – Raw milk important cost factor for e.g. fresh dairy products. If merged entity would raise downstream and upstream prices, why would competitors be less able to secure input? – Would this not assume some sort of predatory strategy whereby the merged entity prices too low at the retail level or prices too high at the upstream level – big impact on profits with uncertain outcome (not investigated)

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Friesland Foods / Campina – The Commission’s theories of harm 

LLDD – At upstream (sourcing level) Commission defines market for branded products – Parties considered close competitors and combined share very high – However, PL sales very significant in this segment – Commission does not address the question whether significance of PL and buyer power of supermarkets could not prevent merged entity to increase price. Focus on different characteristics of sourcing process and suppliers

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The Commission’s econometrics

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Friesland Foods / Campina – The Commission’s econometrics 

Commission’s first own go at scanner data

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Intensive process under significant time pressure – little scope for interaction

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Commission used AIDS to estimate own and cross price elasticities using scanner data

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In decision Commission modest about objective of modelling (testing market definitions advanced by the parties).

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The modelling requires a priori choices as regards likely substitutes. Commission appears to conclude that AIDS model can help inform market definition but not determine market definition

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Model based on weekly sales data where shares by segment add up to one – problem in LLDD because of weekly promotions having large market expanding effect 10

Friesland Foods / Campina – The Commission’s econometrics 1200000

1000000

Volume in litre

800000

600000

400000

200000

0 2004

2005

2006

CAMPINA NL

2007

2008

FRIESLAND NL

PRIVATE LABEL

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Friesland Foods / Campina – The Commission’s econometrics 

High volumes during promotions due to stocking behaviour and impulse buying as well as design of promotion (e.g. BOGOF)

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Leads to overstatement of price responsiveness and hence elasticities in Commission’s model (and would lead to wider markets in a SSNIP context)

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As regards LLDD, Commission dropped econometric results (but not change position).

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Comments and reflection of the Commission itself led it to change the specification for fresh basic dairy, leading to mixed results. Neither supporting nor rejection the Commission’s theories of harm in the decision.

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