Market Definition with Differentiated Products: The Post-Nabisco Cereal Merger

Market Definition with Differentiated Products: The Post-Nabisco Cereal Merger

Description

Antitrust litigation has come to rely to a greater and greater extent on empirical methods. While the range of applications is quite broad, it is not unusual to observe multiple regression and other statistical methods being utilized in defining relevant markets and in predicting the price increases that may result from the strategic decisions of the merging firms. With respect to market definition, it is essential for the fact finder to assess buyer substitution patterns as effectively as possible. Historically, most of the relevant substitution evidence has come from indirect indicators related to seller practices-marketing studies and the like. Increasingly, however, econometric methods have been used to supplement these indicators, often with determinative outcomes. State of New York v. Kraft GeneralFoods, Inc. is a prime example; Kraft was a fully litigated merger in which econometric methods played an important role. The court was presented with both direct and indirect evidence of the responses of buyers to changing prices, and econometrics made much of it possible. There are important demand- and supply-side explanations for the rapid growth of empirical methods. On the supply side, the rapid improvement in computing technology has made empirical methodologies feasible and economical. Accordingly, the enforcement agencies and economic and marketing experts in the private sector now make frequent use of supermarket scanner data available commercially from two firms, Nielsen and Information Resources, Inc. (IRI). Coincident with the improved technology has been the development of a number of empirical methods that have been utilized with some success by industrial organization economists. On the demand side, judicial interest in using statistical methods also has been growing rapidly. Courts are finding, to a greater and greater degree, that reliable statistical evidence can be invaluable in deciding questions of impact, harm, and damages in a range of cases, including antitrust. Accordingly, the Federal Judicial Center's Reference Manual on Scientific Evidence contains a chapter on statistics and a chapter on multiple regression. In this essay I use the Kraft case as a springboard for a discussion of the increasing importance of empirical methods in merger analysis. In doing so, I emphasize, but do not restrict myself to comments relating to market definition. While there is little debate about the importance of the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines in merger cases, there are nagging questions about the role of empirical methods when mergers involve highly differentiated products. I will suggest in this essay that market definition should play a significant role in the analysis of competitive effects of mergers, but that the Guidelines are difficult to apply when products are highly differentiated. Furthermore, I believe that market definition should play a more limited role when the focus of the merger analysis involves unilateral effects. Kraft General Foods, Inc., which owns Post cereals, entered into an agreement to buy the ready-to-eat (RTE) cereal assets of Nabisco on November 12, 1992. The acquisition was completed on January 4, 1993, without a second request by the FTC. However, on Feb. 10, 1993, five weeks after the acquisition had been completed, the New York State Attorney General sued, seeking to have the Nabisco assets divested or the merger rescinded. After a three-week trial, Judge Kimba Wood of the U.S. District Court, Southern District of New York, ruled in favor of the defendant, and the State of New York opted not to appeal the verdict. During the trial there was extensive testimony relating to market definition, coordinated effects, and unilateral effects by the State's economic expert, Ronald Cotterill, by Kraft's economic expert, myself, and by the court-appointed economic expert, Alfred Kahn. My role as defense expert carries with it the advantage of seeing the issues from the inside as a participant, and the disadvantage that one's perspective is inevitably affected by one's own position. Because my goal is to highlight methodological issues, and not to reargue the merits of the case, I am hopeful that the advantages will outweigh any disadvantages.

Source Publication

Global Competition Policy: Economic Issues & Impacts

Source Editors/Authors

David S. Evans, A. Jorge Padilla

Publication Date

2004

Market Definition with Differentiated Products: The Post-Nabisco Cereal Merger

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