Nestle-Perrier Merger
...to purchase domestically rather than import • Low product differentiation: It’s all WATER! Little taste difference or mineral content differences, dramatic changes in technology on how to source or produce bottled water unlikely Given the dominant market position, industry factors and previous evidence of collusion it is likely that post merger adoption of non-competitive actions could occur. Can collusion last? In the long term a colluding firm might be tempted to “cheat” and gain extra profits (ie. through increased rebates to the buyer) (Prisoner’s Dilemma). It is only when firms can mutually agree not to cheat that long term collusion can succeed. In this merger case there exists an industry trade association (Chambre Syndicale des Eaux Minérales) which reports prices/rebates/sales volume data to all producers. This association supports the sustainability of long term collusion because producers are transparent and therefore any attempts to cheat would be recognized by the other firms. The lower incentives to cheat increase the likelihood of collusion. Efficiency Analysis Will consumers necessarily be hurt? Efficiencies from a merger can be gained from reduced production costs or marketing/advertising/R&D synergies. In the Nestle-Perrier merger there is unlikely to be a reduction in production costs. All mineral water producers currently share the same cost structure. On the contrary with a historical look at mergers there is sufficient evidence that suggest mergers actually increase costs. Because prices have remained stable over time it is unlikely the customer will enjoy any price decrease because of the merger. However, it is conceivable that the merger could decrease the discounts currently enjoyed by the buyer. For example, if Perrier previously offered a 15% discount and Nestle offered only a 10% discount a post merger discount might be reduced to 10% across all products. Collusion could form with BSN to further reduce these discounts. End users of the water wouldn’t expect a large increase in price therefore the distributers gross margins will be gouged. Similarly, because of the low product differentiation the customer will not likely benefit from an improved product post-merger. Dynamic Analysis Will the competition process take care of the problem by itself? Although structural analysis is at a static point of time it is useful to analysis the long term process to determine if competition will erode the advantages of collusion and post-merger dominance. Innovation and technology can be useful over the long term to lessen the advantages enjoyed by a colluding oligopoly. Firms with new technologies can enter the market previously blocked by existing technologies. In the Nestle-Perrier merger case it is less likely that technological innovation with respect to the production/bottling/distr...