The United States district court for the District of Columbia is a case that was brought against Anheuser-Busch InBev SA/NV (ABI) to oppose the acquisition of Modelo group by ABI. It was brought up since the government felt that the proposed merger was violating the law through illegal ownership or acquisition of another firm. In addition, the government felt that the acquisition was threatening fair competition in a free market, and the consumers would suffer most as a result of the merger.
Facts to the Case
- The case involved two beer companies in the United States, which were ABI and Modelo Company. The two were stiff competitors where ABI was the price leader in the market.
- ABI is a corporation organized and existing under the Belgium laws with its headquarters in Leuven, Belgium. It is the largest brewer and seller of the beers sold in the United States that owns and operates up to 125 breweries in the world. Of these breweries, 12 are in the United States with more than 200 beer brands.
- Modelo Company is organized and exists as per the Mexican laws with its headquarters in Mexico. It is the third largest brewer of the beer sold in the United States.
- The market share involved Modelo having a 7% market share, Heineken 6%, others 22%, miller Coors 26% and ABI 39%. This meant that ABI and miller Coors were the two largest brewers with ABI setting the trend for the product prices.
- Modelo did not follow the ideas or the steps of ABI of increasing prices and thus ABI, and Miller Coors was forced to lower their beer prices to prevent trading off of their beer products with those of Modelo.
- Agreement between Modelo and ABI would lead to reduced competition in the market leading to increased levels of prices and would also foresee the selling of the 50% interest that Modelo owns in Crown Imports LLC. The defendants were in an interstate commerce where their trade brings a lot of billions of dollars' worth of beer.
- The proposed acquisition of Modelo by ABI gives ABI complete of the company and the access to sensitive information regarding the competition. This is information that is not available under normal circumstances of competition.
- The district court has the jurisdiction over the defendants and also in the determination of the case.
Anti-trust Laws Violated
The anti-trust laws violated in this planned merger are the Clayton Act 1914 §7, 15 U.S.C. §§ 18. This is an act that was passed in 1914 after inadequacy was found in the Sherman act of 1890. The Clayton act in section 7a requires that companies planning to enter into a merger notify the federal trade commission and the attorney general of the United States department of justice antitrust division. Section 8 prohibits any person from serving as a director of two or more institutions if specific values are not met.
Moreover, the act prohibits any practice in the market that would lessen competition. In this case, by ABI merging with Modelo Company, ABI would give a larger control of the market in terms of supplying beer. As a result, competition would be greatly reduced since Modelo is a direct competitor with ABI. Hence, the product prices would rise since ABI would influence prices upwards as is the norm. The merger would also reduce product innovations since there will be less incentive to innovations hence acting to the detriment of the consumers.
The proposed merger also violates the federal trade commission act that gave way to the establishment of the federal trade commission. This is because; ABI and Modelo do not notify the commission of their proposed merger, yet the commission is empowered to limit or prevent unfair methods of competition or practices that are likely to affect commerce.
Relevant Cases
- Robert vs. National Basketball Association, 1970
This is an anti-trust case law that was filed by American basketball association player Oscar Robertson against the national basketball association. The case was determined with the court preventing the proposed merger of the NBA and the American Basketball Association.
- United states Vs. Continental Can Co., 1964
This is an anti-trust case law of 1964 which sought to address anti-trust issues. One of the issues was to define market segment as a base of reviewing the merging of companies that make different but related products. The case involved continental Can Co, a metal container manufacturer, which sought to acquire Hazel-Atlas glass, a glass container manufacturer. The court threw out the case on the basis that the government did not prove how the acquisition would lead to reduced competition.
- United States vs. Van's Grocery Co, 1966
According to the court, the resultant merger did not violate the Clayton act.
- Market dimensions
- Product market
- Market price
The market price is the prevailing price of commodities in the market. Under perfect competition or fair competition, the market price is determined by the forces of supply and demand. The forces of supply and demand lead to an equilibrium point that gives the price that the producers should sell their product. Disruptions in the market, as a result of unfair competition, the equilibrium price shifts leading to a higher or lower price than before. This is the case in the proposed merger of Modelo and ABI, where the price is supposed to be determined by the market forces hence low prices and product innovations. Due to the current competition from Modelo to ABI and other brewers, the prices are low. However, ABI is not content since its desire is to charge higher prices than the current and in the process realize huge profits. As a result, it proposes to acquire Modelo so that it can have a larger control of the market and hence influence the market price. This would lead to reduced competition hence increased prices of the prices of beer.
- Cross Price Demand Elasticity
This is the degree of responsiveness of the quantity of a good demanded as a result of a change in price in by a similar good or a substitute good in the market. For instance, the demand of butter may be influenced by the change in price of margarine since the goods are close subtitles. If the price of margarine increases, the quantity of butter may increase leading to the trading off of the products by the consumers to consume the low priced products.
In the case of Modelo and ABI, the concept of cross-price elasticity is evident since ABI is sensitive to the pricing strategy of Modelo. Though ABI owned or possess a large market share and acted as a price leader as earlier seen, the pricing strategy of Modelo affects its sales. That is; ABI has to decrease the price of its beers since Modelo prices are lower compared to the ABI prices. If ABI maintains its high prices, consumers will trade-off the beer of ABI with that of Modelo leading to decreased sales and the quantities demanded ABI brands.
- Monopolization
Monopoly power is influenced by several factors such as possession of a scarce factor or resource in the market. Since the good is limited, the firm enjoys the privilege of manufacturing the product individually and can, therefore, charge high prices. On the other hand, monopoly power can be influenced by players in the market where they collude to fix high prices or merge in order to command a large market share. This is evident in the case of Modelo and ABI where the two companies propose the merging and ownership of Modelo by ABI.
This would facilitate the acquiring of the market segment that is currently held by Modelo by ABI giving ABI a larger market share. Since Modelo is a direct competitor and a major player in the industry, its market would be taken by ABI concentrating market power in the hands of one big firm and other several firms. This would lead to monopolization of the market where ABI sets the prices and other firms do not have a choice but to follow.
- Consumer and Producer Surplus
The consumer surplus is the difference in the amount that the consumers are willing to pay and the actual amount that they are paying currently. On the other hand, producer surplus is the difference in the price that the suppliers sell products and the minimum price that they are willing to charge. When consumers pay low prices for goods in the market, the consumer's surplus is enhanced since they have remnant income or high purchasing power to purchase goods.
When the prices are high, the purchasing power of the consumers is reduced meaning they can only purchase a few items with an initial income they had. The opposite is true according to the producer surplus. When the prices are increased, the producer's surplus is enhanced because higher prices will translate to higher revenues for the producer while low prices will translate to less or reduced revenues.
In the case of ABI and Modelo, the current producer surplus is low since ABI and other companies are forced to lower their prices as a result of low prices being charged by Modelo. This means that the consumer's surplus is enhanced as the consumer does not have to pay high prices for the goods. If the proposed merger were to succeed, prices of beers would be high since from past experiences and actions it is evident that ABI wants to charge high prices. This would in return reduce the consumer's surplus but enhance the producer's surplus.
- Market Entry
Market entry entails the entrance of new firms in an already existing market. In perfect competition, new entrants are not limited into gaining entry in an already existing market and those seeking to exist also not limited. As a result, there are no costs of entry and the market experiences fair competition. However, when there are monopolistic features in the market, a monopoly can place barriers of entry where it charges low prices for products in the short term to limit entry but then increase the prices later. In the case of Modelo and ABI, if the proposed merger works, monopolistic power will be placed in the hands of ABI and can limit entry. This is to ensure that it remains with a large market share where it can control prices and hence ensure high profitability.
- Market Demand and Supply
The market is the quantity that is demanded by the consumers in that particular market. It is dependent on the price levied by the producers and is inversely related to price. That is, the higher the price of a commodity, the lower the demand and vice versa. For instance, if prices increase, the demand of a commodity will decrease, and if prices decrease, the quantity demanded increases.
Supply of a good is determined by the prices that the producers are willing to sell their products and is inversely related to price. That is, when prices of goods increase, the producers are willing to supply more and when they decrease, they supply less. Therefore, in this case, the market demand and supply is clear that it is determined by the price charged by the beer firms. These prices re low since the firms do not collude when setting them. However, the proposed merger would have adverse effects on the price and hence impact the demand and supply of the product. That is; the prices would increase since ABI will increases prices leading to decrease in the quantity demanded and increase the quantity supplied.
- Geographical Market
The geographical market involves where products are sold by the firms in the industry. In this case if Columbia district, the geographical market involves 26 markets that the beer industry in the United States operates. This geographical market is covered with the five beer firms as earlier indicated. Advertising for the beer brands takes place through television adverts while brand building takes place at the national level.
- Actual and Potential Buyers and Sellers
The actual sellers of beer are the five beer companies as reviewed in the case that comprise of Heineken, Modelo, ABI Miller Coors and other small firms. The actual buyers are the consumers of beer in the current market while potential buyers are those who may consume beer in the future. Potential seller may include firms that may seek entry into the beer industry in the short term and the long term.
- Spot market, short-term and long-term contracts
A spot market involves selling goods at cash point. Short term contracts involve entering into agreements that will take a short duration of time such as one year while long-term contracts are bound to stay for a long duration of time. In this case, the proposed merger is in the form of a long contract since it will ensure full ownership of Modelo by the ABI Company.
Summary of the Judgment
Cases in court are determined by the facts at hand and the extent of the violation of the acts that govern the conduct. Therefore, the defendants in this case can be found guilty according to:
- Non-disclosure of Information
It is mandatory for firms in the acquisition process and plan to inform the attorney general and the federal trade commission. The federal commission prohibits any acts that may hinder trade or practices that are seen to prevent commerce. As such, then defendants are guilty of not informing the relevant governing bodies of their intention of merging and full ownership.
- Illegal Acquisition
The acquisition between the two firms is prohibited as per the Clayton act that prohibits acts that will reduce competition in the industry. The defendants are guilty of conspiring to form a merger that will greatly reduce fair competition. Modelo and ABI are direct competitors, and Modelo pricing strategy influences the market prices. ABI in its pricing strategy has to lower its prices since Modelo charges lower prices. If the firms merge, competition will be eliminated giving ABI power to increase prices. This is against fair competition.
- Consumer Welfare
Clayton acts and other acts such as the Sherman act advocates for consumer welfare. This is through fair product pricing and increased product innovation. In the absence of the merger; the defendants utilize different pricing strategies. Due to this, the prices of beer remain relatively low; product innovation is enhanced and hence enhanced consumer welfare. If the firms merge, the consequences will impact on the consumer welfare affecting the utility and the quantity that they derive from the product.
- Monopolization
Through the merger, the market will be monopolized giving ABI the power to determine prices. This will worsen an already bad case where ABI is the price leader and other have to follow. As a result of market monopolization, consumers will be faced by high beer prices impacting on their purchasing power.
Rebuttal to the Judgment
- Counter-effect Strategies
The defendants' case may be rebutted ion several grounds. This is on the ground that the defendants do not just enter into an agreement that they do not know of consequences, but also an agreement whose effects they seek to address. That is the defendants agree that the merger will have an impact on the market but devise a plan of selling the 50% interest of Modelo in Crown LLC to constellation, to share the market power. The plan will allow Constellation Company to import and trade Modelo beer into the United States.
- Weak Government Argument
The defendants' case may also be rebutted on the basis of the prosecutor to prove the extent of inadequacy of the proposed remedies. This is evident where the prosecutor says that the remedy is inadequate yet it does not show how.
- Strategic Agreements
The defendants’ case may also rebut on the basis of a strategic alliance. This is whereby the proposed merger stands to benefit all the firms involved. Constellation will be given power to trade in Modelo beer, while, on the other hand, both Modelo and ABI benefits. In addition, the proportion of the market to be acquired by ABI is only 7% compared to others such as miller Coors, who have a substantive market share of 26%. As such, the market power that will be concentrated in the hands of ABI will be very small and will also be shared by Constellation, who will be independent in selling of Modelo beers.
