Results from the empirical analyses conducted in this chapter come with a certain warning. Due to the nature of the model employed, some restrictions on the modelled behavior of firms and consumers exist. These restrictions arise mostly from the mathematical form in which the behavior of firms and consumers is being represented in the model. The ability of the model to fully correspond to the real world situation is therefore limited and the empirical results reached in this chapter should be taken with certain caution. Because the model is a simplified representation of the reality, it is often useful to complement the quantitative analysis with qualitative evidence.
However, if modeling assumptions are reasonable, results can be a very useful indicator of the true real world situation on the market post-merger. This is especially true if the quantitative results and accompanied by qualitative analyses covering dimensions not captured well by the model (e.g. analysis of entry and exit, consumer surveys indicating their preferences etc.).
One way to address the limitations inherent to the model is to list them out and explicitly identify direction, in which would the results be altered if the model were extended in the particular direction. For example, one can be worried about dynamic effects caused by storability of the product. Hendel & Nevo (2006) compare static and dynamic models used for analyzing this issue and show that using static models, which do not account for storability, tend to underestimate mergers' price effects.149 Analysis of similar issued and their relevant literature identifying bias of the empirical results can be found in chapter 3.4.
Limitations implied by the model used this doctoral thesis mostly relate to non-price promotions, static market representation excluding post-merger entry and exit and passive retailer behavior. Non-price promotions refer to a specific placement of products on high-profile locations (e.g. end of an aisle) in retail stores. The reason for omitting this dimension in the model was primarily lack of sufficient data on non-price promotions. The model defined in this doctoral thesis also does not account for the option of post-merger market entry or exit. Incorporating this dimension into the model would likely result in lower price effect from the merger as the thread of entry would put a competitive constraint on the pricing policy of merging firms. However, as described in section 126.96.36.199, the likelihood of post-merger market entry is low given the market characteristics (i.e. the high investments necessary for developing and launching a new product or the need to convince retailers to carry the new product). Retailers are also modeled as simple re-sellers who keep a fixed markup over the wholesale price, but do not influence the oligopoly interactions between individual deodorant producers. This limitation is described in more detail in section 3.4.5. The bias present in the results due to ignoring interactions between retailers and wholesalers cannot be easily identified and could go both ways.
Overall, the results presented in sections 5.2 and 5.3 are based on merger simulation model using static model of competition on price with specific representation of consumers' demand. Several tests and qualitative analyses have been conducted (see e.g. sections 5.2.7 and 5.3.7) to justify the modeling assumptions used in my empirical research. The results however remain mostly indicative and have to be view and interpreted within limits under which they were calculated.
This chapter presented results and limitations of empirical research investigating the efficiency of remedies imposed in the P&G/Gillette merger. Two separate markets were investigates – market for men’s deodorants and market for women’s deodorants. Because the main competition concern articulated by the FTC involved unilateral effects, I evaluated the efficiency of remedies to prevent unilateral effects. Results for both markets confirm that imposing remedies was indeed necessary as there was no other market force (market entry, buyer power) that would offset or deter negative price increase caused by the merger. The level of merger efficiencies on either market was also very unlikely to reach the necessary level of compensating marginal cost reductions. For that reason, FTC requested remedies in both men’s and women’s market.
In the man’s market, Right Guard deodorants were sold to a new entrant Henkel. Results confirmed these remedies to be successful in mitigating unilateral effects and keeping prices very close to the pre-merger level. Other possibility was divesting Old Spice brand as part of the remedies. Even though selling Right Guard to Unilever or Revlon would not cause significant price increase, divesting the assets a new entrant creates significantly lower upward pricing pressure. Overall, the analysis have shown that even though selling Right Guard to Henkel as a new entrant did not represent the most efficient set of remedies, it was the second-best option and was very close to the most efficient one (divesting Old Spice to a new entrant).
In the women’s market, both brands previously owned by Gillette (i.e. Dry Idea and Soft&Dri) were divested to Henkel. Other possible sets of remedies were investigated. If only Dry Idea or Soft&Dri were divested and the other was acquired by P&G as part of the merger, significant price increase would occur. Divesting both brands was therefore necessary. If P&G were to indeed retain one of these brands, it would have to divest one of its original brands owned pre-merger. Such process was unlikely as it would have been very complicated in terms of transferring production process, all business-related matter and other activities tied to a particular brand. Divesting both original Gillette brands to a new entrant, which corresponds to remedies ordered by the FTC, therefore represents the most efficient way of pursuing economic goals of merger regulation.
Presented empirical results have shown that the remedies imposed by the FTC in the market for men’s deodorants and in the market women’s deodorants were very efficient. There was no smaller set of remedies on either market that could have reached the same economic goal. But on men’s market, there existed a set of remedies that could have prevented negative merger effects more efficiently. Divesting Old Spice to a new entrant, rather than divesting Right Guard to a new entrant as approved by the FTC, would have been more efficient and would have led to smaller price increase post-merger. However, the difference between these two scenarios is almost negligible. Because simulations have shown that without any remedies, significant anticompetitive effects on the women’s market would have arisen, it remains questionable, why FTC did not strictly order structural remedies and required only an option for the buyer of assets from the men’s market to buy selected assets from the women’s market.
Empirical research presented in previous chapters cover the ex-post merger assessment of unilateral effects in the P&G/Gillette merger decision in the U.S. In this chapter, I discuss applicability of my research for the European competition policy. I firstly discuss the investigation of P&G/Gillette merge conducted by the European Commission and then link my research to this decision.
P&G/Gillette merger in EU
Due to the significant presence of both P&G and Gillette on the European market, merger notification had to be filled to the European Commission.150 After receiving the notification in May 2005, the European Commission conducted a merger investigation and identified two major competitive concerns from this merger – unilateral effects and conglomerate effects.
Unilateral effects were most likely in the area of toothbrush production. The Commission had distinguished two separate relevant product markets – market for manual toothbrushes and market for powered toothbrushes. Powered toothbrushes can be characterized by having replaceable heads and can be powered by either exchangeable batteries or by an internal rechargeable battery. Before the merger, P&G was active only in the segment of battery-powered toothbrushes with its brand “SpinBrush”, while Gillette was producing a full range of toothbrushes (both battery powered and rechargeable) under its “Oral-B” brand.
Merging parties argued that the market for powered toothbrushes should also be divided – into a market for battery-powered toothbrushes and market for rechargeable toothbrushes.151 The Commission identified some level of demand substitution between both product groups, but it was present mostly between battery toothbrushes and only low-end rechargeable tooth brushes. Even though the production process for both types of toothbrushes was found to be quite similar, significant additional know-how is necessary for shifting a production from battery-powered toothbrushes to rechargeable toothbrushes, esp. the high-end ones with sophisticated extra features.
If the relevant product market definition included both battery-power power and rechargeable toothbrushes (as proposed by the Commission), merging parties would had a market share of 65-75 % on average (in EEA), while the next closest competition would had 5-15 % market share (see Table 63).
Table 63 - Market shares (%) for powered toothbrushes market in 2004
Next closest competitor
Source: EC P&G/Gillette merger decision
If battery-powered toothbrushes were considered a separate relevant product market (as proposed by the merging parties), the merging parties would still hold a significant market position by having 45-55 % market share, with the next biggest competitor having 25-35 % market share (see Table 64). Because P&G was active only in the segment of battery-powered toothbrushes, there was no market change in the segment of rechargeable toothbrushes caused by the merger.
Table 64 – Market shares (%) for battery-powered toothbrushes in 2004
Next closest competitor
Source: EC P&G/Gillette merger decision
Having identified a competition concern from unilateral effects in the area of battery-powered toothbrushes, European Commission investigated, whether the potentially negative effects could be countered by a new entry or retailers’ buyer power. Several various barriers to entry were identified by the Commission. Firstly, P&G was holding many patents necessary for the production of powered toothbrushes that a new entrant would have to acquire. Secondly, significant investment into brand promotion, product development and advertising would have been also necessary in order to create brand-awareness among consumers and to get an access to retailer’s shelves. Thirdly, because for most consumers, the product choice is heavily influenced by recommendations of their dentist, a new entrant would have had to create a good relationship with sufficient amount of dentists as well. Given these barriers to entry, the Commission did not consider entry to be an ineffective counterforce to a potential price increase.
The Commission also expressed doubts about retailers’ buyer power acting as a tool for offsetting potentially negative effects from the merger. The investigation showed that the market power of P&G and Gillette was larger relative to the market power of the retailers. The main competition concern on the battery-powered market thus remained undissipated.
European Commission also found out that hindering competition on the battery-powered segment would have also hindered competition on the rechargeable segment of the market. Production of rechargeable toothbrushes was perceived as technologically more advanced and potential foreclosure on battery-powered toothbrush market would have reduced the likelihood of a successful entry on the market with rechargeable toothbrushes.
In order to prevent the price increase caused by the merger and to prevent merging parties to foreclosure their competitors more effectively, European Commission imposed structural remedies on the merger requiring the merging parties to divest some of their business activities on battery-powered toothbrushes market. Eventually, P&G divested their entire brand line “SpinBrush” to Church & Dwight globally, which mitigated Commissions competition concerns also in the EEA area.152
Because the merging companies were active in many other areas besides production of toothbrushes (e.g. production of toothpaste, dental floss, antiperspirants/deodorants, shaving equipment, fragrances, small house appliances etc.), European Commission was concerned about conglomerate effects. On many of the markets, merging parties carried „must-stock“ brands in their portfolios (P&G’s Ariel, Tampax, Always, Pringles, Head&Shoulders, Wella or Gilette’s razor and blades, Duracell, Braun), which were standardly requested by final consumers. After the merger, the joined undertaking could impose weaker brands on retailers in order to supply them with “must-stock” brands. This would lead to leveraging market power from one market into the other using mixed or pure bundling strategies.153 Such behavior could be extended onto three different groups: final customers, large retailers or small retailers.
If the concern were final consumers, bungling strategy would only work if the bundled products were complementary in demand. It was common market evidence that e.g. washing power was being sold in a bundle with softener. However, the merger would not create any new pairs of close complements that did not exist pre-merger. Most of the products that were offered by the merging parties were not complimentary to each other and thus this concern was not very strong.
If the concern were large retailers, the Commission concluded that the risk of portfolio effects resulting from the merger was considerably mitigated by the ability and incentive of retailers to exercise countervailing buyer power. They could threaten merging parties by promoting a new entry or by increasing their sales of private labels. There were also other important brands produced by Unilever or Colgate-Palmolive that retailers could offer.
With respect to small retailers, merging parties could not exploit their lack of buyer power either since there was a strong competition on the downstream market. Many small retailers were identical and offered comparable products. Merging parties would have to offer a high compensation to the retailer for an exclusive deal as he would lose many customers by not carrying brands of P&G’s or Gillette’s rivals.
In the end, European Commission dismissed the competition concern from portfolio effects and focused only on mitigating anticompetitive effects caused by unilateral effects. This resulted in structural remedies imposed on the market for powered-toothbrushes.
U.S. vs European ex-post merger analysis
The research presented in this doctoral thesis evaluates the remedies efficiency of a selected decision from the U.S competition policy. Do the presented results bear any relevance to the European market and European competition policy?
Applicability of my research to the European competition policy depends on two critical points, which were presented earlier in this thesis and which are pivotal to the analysis. One must ask,
what is the goal of merger regulation and with what economic indicator can it be quantitatively measured; and
is the methodology used for the ex-post merger assessment in line with principles of merger investigation and its analytical framework towards investigating horizontal mergers with differentiated products.
Only after reviewing answers to these question can one decide, whether the research presented in this thesis can be used to investigate the efficiency of remedies in the European competition policy, for example in the Commission’s decision in P&G/Gillette case.154
The answer to the first question lies in the so called “substantive merger test”, which relates to the general principle behind merger control. The substantive test used in the U.S. merger control is the SLC test referring to “(S)ubstantial (L)essening of (C)ompetition”, which is being prohibited. According to this test, any merger substantially lessening competition will result in depriving consumers of their benefits from an effective competition and is therefore prohibited. In 2004, the European competition law left its previous substantive merger test based on “dominance”155 and adopted the current “SIEC” test prohibiting mergers which “(S)ignificantly (I)mpede (E)ffective (C)ompetition”. Despite slightly different wording, SIEC test is fully comparable to the SLC test used in the U.S. merger control. Both jurisdictions therefore apply the same basic principles in merger control.
When I discussed the measurable definition of competition policy goal, I intentionally included a specific subsection comparing the U.S. and EU perspective. As section 2.3 illustrated, despite some minor differences, the emphasis of competition policy in both jurisdictions remains on consumer surplus.
Let’s now concentrate on the second question. Before conducting the empirical research, I ensured that the methodology used in this thesis is in line with the basic principles of merger investigation – i.e. to reach useful results despite skipping the very standard step of relevant market definition (see section 2.2). Recent developments in merger regulation, which put more emphasis in investigations on substitutability between products of individual producers than on their market shares and thus allow skipping relevant market definition, are present in both the U.S. and the EU competition policy regimes. This means that merger simulation methodology can be used to investigate merger’s unilateral effects directly in the EU competition policy as well as in the U.S. competition policy.
Because U.S. and EU jurisdictions have the same goal of merger regulation, the goals can be quantified using the same economic indicator and both policy regimes use the same analytical framework for assessing horizontal mergers with differentiated products, empirical research presented in this thesis can be used for analyzing the efficiency of European decision involving P&G/Gillette merger. Using retail scanner data and following the analytical approach described in this thesis, comparable assessment of remedies efficiency for the European decision can be conducted.
Case of Unilever/Sara Lee
Given the empirical analyses used in this doctoral thesis and the investigated industry, one recent merger decision deserves a special mention. It is the European merger case of Unilever and Sara Lee, in which Unilever acquired European activities of Sara Lee in the area of personal care and laundry case.156
General competitive assessment
Activities of Unilever and Sara Lee overlapped in many product markets such as deodorants, skin care, fabric care, after-shave treatment, oral care or hair care. European Commission focused its attention mostly on the market of deodorants as the overlap of the merging parties on this market was the most significant (joint market share was above 40% in 6 EU member countries).
Regarding the relevant product market, the merging parties suggested one market for all types of deodorants. However, European Commission was wary as deodorants were becoming increasingly differentiated according to the gender of the customer. Most major brands offered product variations separately for male and female customers (e.g. Nivea and Nivea for men) or focused solely on one gender segment (e.g. Axe offered deodorants only for young males). In previous decisions, the European Commission suggested that separate markets for male and female personal care products may exist.157 For these reasons, the EC decided to investigate the issue thoroughly. In the end, the EC defined two separate relevant markets – one for male deodorants, the other for non-male deodorants.158
The EC reached its decision about separate gender-specific markets on several facts and analyses. Firstly, most deodorant brands used their marketing strategy to aim specifically at one of the two relevant markets. Specific brand variation for either market existed as well. Similarly, retailers presented male and non-male deodorants in their stores separately. Each group of deodorants was usually located in a separate rack of shelves. Market shares of the gender-specific product variations also differed between the two relevant markets significantly, which could be an indicator of different customer preferences on each relevant market. At the same time, different market shares of each brand (and each company) indicate different competitive landscape on the two relevant markets and hence different merger effects.
Secondly, significant price differences between average price of male and non-male deodorants existed, making male deodorants more expensive. This could have been caused by independent demands on both markets, allowing producers to charge higher premium on male market relative to non-male market. Increase in price post-merger on only one of the market seemed therefore feasible. Similarly, the EC identified differences in annual growth of both product markets. This might be another indicator of two independent demands, one in each segment, driven for example by different levels of product penetration on each market.
Thirdly, the European Commission obtain internal documents and consumer surveys showing that women do not use deodorants belonging to the male market and vice-versa. This showed that there does not exist sufficient demand-side substitution between the two analysed markets that would rationalize including male deodorants in the non-male market or vice-versa.
Lastly, the EC found out that supply-side substitution was also not strong. A company present on one of the markets could easily enter the other market with respect to production, but launching a new product, stimulating customers’ demand and making consumers aware of the product would take significant amounts of time (1-3 years). The EC therefore concluded that a significant price increase on one gender-specific market was unlikely to stimulate an a supply-side substitution from the adjacent market.
To further confirm the correctness of results obtained from the qualitative analyses, the EC decided to conduct an empirical analysis using merger simulation models. Given the market being analysed, the EC used a model comparable to the model used in this doctoral thesis - supply side of the market was represented by a Bertrand model of competition with differentiated products and demand by a nested-logit model. The estimation of the model was performed using Nielsen retail scanner data. The resulting estimates were used to calculate a SSNIP test, which confirmed the existence of two independent relevant gender-specific markets (i.e. male and non-male markets).
The EC tried several specifications of their model, which it estimated for four geographical regions (Belgium, Spain, the Netherlands and the UK). In the first model, the EC used a one-level nesting structure of demand dividing all products into “male” and “non-male” nests. In the second model, the EC used two-level nesting structure, in which it divided all products in gender-specific nests based on their skin type (i.e. sensitive, non-sensitive skin). In both models, the correlation of preferences for products within each gender-specific nest was quite strong (0.8-0.92 for Spain, the Netherlands and Belgium, 0.62 for the UK), indicating a clear substitution patterns in consumer preferences.
Highest price increase predicted by the model was in Belgium (4-5%), followed by the Netherlands (3.8%), Spain (2-2.2%) and the UK (2.5%). Because the activities of merging parties were stronger in the non-male market, the most significant post-merger price increases originated there. The EC also used the structural model to calculate the profitability of 5 % price increase, which corresponds to the methodology of a SSNIP test. The results indeed showed that variable profit would increase in either the male or the non-male market if the price of deodorants within the segment increased by SSNIP. This indicates that two separate antitrust markets exist.
The EC also calculated compensating marginal cost efficiencies, which refer to the required decrease in marginal cost of the merging parties post-merger in order to off-set any price increase induced by the reduction of competition. The required average efficiencies were 15-22%, 20-22%, 6-7%, and 8% for Belgium, the Netherlands, Spain, and the UK, respectively. This is in line with the overall results of the empirical analysis - higher predicted price increase requires significant marginal cost reductions to be fully off-set. The same analysis for the P&G/Gillette merger case investigated in this thesis is presented in section 188.8.131.52 for men’ market and section 184.108.40.206 for women’s market.
As part of the robustness checks, the EC conducted various analyses. Firstly, the EC used Monte Carlo simulations to calculate the distribution of predicted price increases based on the point-estimates of demand and their standard errors. Results showed that even when accounting for the 90 % confidence interval, the resulting predicted unilateral effects of the merger remained significant. This analysis is comparable to the calculations conducted in this thesis and presented in sections 220.127.116.11 and 18.104.22.168.
Secondly, because the nesting choice is done prior to the demand estimation, alternative nesting structures were tried. Some of the structures generated results not compatible with the underlying random utility theory, others predicted similar price increases but resulted in substitution patterns less consistent with other qualitative data. Similarly as in the analysis performed by the EC, I re-estimated the demand model using alternative nesting structures. However, all of the alternative nesting strategies were outperformed by the nesting structure used in the final model. Details are discussed in more details in sections 5.2.3 and 5.3.3.
Thirdly, the EC calibrated the model using available marginal cost information. From the merging parties, the EC possessed information on true industry marginal costs, even though not on the SKU level on which the demand was estimated. In order to increase the precision of the model, the EC calibrated the simulation model by changing the demand parameters around their point estimates in a way that would result in predicted marginal costs more compatible with the available marginal cost information. The calibrated model did not return significantly different size of predicted price increases post-merger. I was not able to perform comparable sensitivity analysis as information regarding marginal costs are confidential and are not made publically available.
After the EC informed the merging parties about its structural model and its results, the merging parties submitted a study prepared by the CRA, in which EC’s structural modelling is critically reviewed. Issues such as unit of measurement, instrumental variables used for the demand estimation, alternative nesting structures or the effect of two-stage competition on the results are discussed in detail. A careful reader noticed that most of these issues are purposefully also address in this doctoral thesis.
This thesis evaluated the efficiency of FTC’s decision in the P&G/Gillette merger case, in which structural remedies were imposed. In order to do that, I answered the following pivotal questions:
What reasoning led FTC to impose a given set of remedies and what form did the remedies take?
How would have had the market developed absent any remedies imposed on the P&G/Gillette merger decision?
What possible alternative decisions could have FTC taken (i.e. what were the appropriate counterfactuals)? How does the decision made by the FTC fulfil the economic goal of a merger control policy in comparison with the ability of available alternatives to reach the same goal?
After describing the policy environment, in which the investigated decision was made and defining the analytical framework for the efficiency analysis conducted in this thesis, I looked at FTC’s reasoning behind its decision. FTC’s merger investigation showed that combining business activities of the merging parties would lead to significant lessening of market competition on four markets. Efficiency of FTC’s decision on two of those markets – market for production of men’s and women’s deodorants – was investigated in this thesis.
Based on the public information and structural model employed in this thesis, I have shown that upward pricing pressure caused by the merger would not be countered or mitigated by any market force such as countervailing buyer power, threat of entry or merger efficiencies. These results are true for both investigated markets. Further analyses were conducted for each market separately.
I started by investigating the market for production and distribution of men’s deodorants. Empirical results have shown that unconditional clearance of the merger would have lead to significant price increase and would be considered anticompetitive. Imposing some set of remedies was therefore necessary. In order to evaluate the efficiency of remedies imposed by the FTC, I simulated market equilibria for several counterfactuals involving divestment of various assets to different potential buyers. Results have shown that the most efficient solution was to divest Old Spice to a new entrant. According to FTC’s decision, Right Guard deodorants were sold to Henkel, who used this opportunity for a market entry. Comparing simulations for both outcomes shows that even though FTC did not use the most efficient set of remedies, the difference between both scenarios is practically negligible. FTC’s decision on men’s market can therefore be considered as efficient.
Secondly, I investigated the market for production of women’s deodorants. Keeping in mind that there was no market force that would counter or deter merger’s unilateral effects, I have shown that approving P&G/Gillette merger without any remedies would lead to significant price increase detrimental to consumers. Then I analyzed, whether both original Gillette brands (Soft&Dri, Dry Idea) had to be divested – as ordered by the FTC’s decision. Simulation results confirmed that divesting both brands was indeed necessary, because letting P&G acquire any one of these brands would lead to a significant price increase. Comparing simulation results for various counterfactuals, I identified that the divestment of Soft&Dri and Dry Idea to a new entrant was the most effective set of remedies available. This set of remedies corresponds to the remedies approved by the FTC. FTC’s decision on this market can therefore be considered as efficient. In light of these facts, the only question remains, why FTC did not strictly demand structural remedies on this market. Merging parties were only required to provide a buyer of assets divested on the men’s market with an option to acquired Soft&Dri and Dry Idea brands. It seems that if Henkel chose not to buy these brands, P&G/Gillette merger would have led to a significant price increase and anticompetitive effects on this market.
What are possible extensions of my research? Two main areas are of interest. Firstly, robustness analysis and the IIA assumption test for the women’s market indicates that some level of consumers’ substitution patterns between products within the same nest remains unaccounted for. One-level nested model used in my research assumes that consumers do not differentiate between products within the same nest and the probability of each product being chosen (conditional on the given nest being chosen) can be expressed by product’s market share inside the nest. This assumption was shown to be incorrect, indicating there is some correlation of preferences between products inside each nest. However, no better specification of the nested logit model that could capture this effect was found. Choosing a different demand system, which will offer more flexibility in modeling consumer preferences (e.g. BLP model) on women’s market might be appropriate.
Secondly, the research presented in this thesis focused on the ability of remedies to efficiently mitigate unilateral price effects of the merger. However, remedies imposed by the FTC also influenced coordinated effects of the merger and the likelihood of market players limiting their mutual rivalry. Number of players on the market, their market shares or their mutual multi-market contact can (among many other factors) influence the likelihood of coordination. Even though coordinated effects were not the reason why FTC imposed structural remedies in this case, it would be interesting to see how did the P&G/Gillette merger changed the likelihood of coordinated effects and whether this likelihood was increased or decreased by the imposed set of remedies.
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