Nestle-Perrier
Merger case study
Introduction
Both companies are internationally
active in the nutrition sector
24%
February 1992: Nestlé notified
a public bid for 100% of the
shares of Perrier
24%

Merger could lead to a
dominant position for Nestlé
17%
35%
The relevant product market
non-alcoholic refreshment beverages
bottled water
purified tap water
sparkling
still
soft drinks
source water
mineral water
sparkling
still
spring water
still
sparkling
Distinction made by the
Commission
Source water
Characteristics
Soft drink
Clean, pure, natural
Taste
Sweet, refreshing
Source water, minerals
Composition
Additions of flavour,
sugar
Large, daily use
Quantities
Small, occasionally
Intend to use
Satisfy a particular
taste pleasure
mid range
Price
High
Spring/source
Location of production
Everywhere
Fulfill basic need
Results
Low demand side substituability
Low supply side substituability
Small elasticity of demand
Possibility to set high prices
Need for marketing and promotion
The relevant geographic market
Transport costs
- Water can only be only bottled at source
- Water: low value – high volume product
- 10% cost addition for a distance of 300 km +
glass bottles even more expensive
 Imports are not competitive
 The relevant product market is France
Barriers to entry
-
-
-
highly concentrated market
(Nestlé/Perrier/BSN: 82% market shares)
Advertising (sunk) costs
Mature markets
Limited shelve space
Logistic adaptation
Oligopolistic dominance
Oligopoly:
- limited number of firms and a high number
of buyers
- inefficient because it leads to a price level,
which is higher than the competitive price
(marginal costs)
- strategic interactions
Dominant position vs.
balanced duopoly
Nestlé:
- would have a market share of more than 50%
- company proposed to sell a major source of Perrier
(Volvic) to its competitor BSN
Nestlé and BSN:
- similar capacities
- similar market shares (i.e. 38%)
- 90 % of all still water supply
Single firm dominance vs.
Oligopolistic dominace
Merger regulation:
prohibition of mergers that could create/strengthen
single firm dominance
Commission argued:
scope of the merger regulation should be enlarged
to oligopolistic dominance:
1. weakened competition between the oligopolists
2: which is likely to be further weakened by a
significant increase in concentration and
3. in which there is no sufficient price constraining
competition coming from outside the oligopoly
Characteristics of oligopolistic
dominance for Nestlé/BSN
1: - parallelisms of prices over a longer period
- high production-cost margin
- large gap between ex-works prices
2: anticompetitive parallel behaviour/collective abuses
similar sizes and natures
neither one could gain a significant cost advantage
(technology & R&D played no major role)
market transparency
3: missing competitive constraints:
no imports, no fringe firms, no retail buying power,
high barriers to entry, price inelastic demand
Collusion
The cooperation between companies in terms of prices
or quantities produced, etc. in order to maximize
their profits.
- explicit, implicit/tacit
- dynamic model of repeated interaction (repeated
game theory) can explain collusive behaviour
Nestlé and BSN:
- Could tacitly agree to sustain a high price level and
the present level of quantities produced in order to
maximise their profits
Final decison of the Commission
a)
b)


Prohibition of takeover of Perrier by Nestlé without
the transfer of Volvic to BSN [avoid Nestlé having a
dominant position (52% market share)]
Prohibition of the merger between the firms with the
transfer of Volvic to BSN [avoid the strengthening of
an oligopolistic dominance]
Obligation for Nestlé to sell sources (Saint Yorre,
Vichy, Pierval, Thonon, and others), namely 3 billion
litres of water capacity when taking over Perrier
Commission created an asymmetric oligopoly and
hoped to avoid tacit collusion and its negative
impact on consumer welfare.
The critics of Compte/Jenny/Rey
The Commission‘s solution:
Possibility of tacit collusion!
The critic of Compte/Jenny/Rey
The relevance of capacities
- the third party has less capacities than
Nestlé/BSN
- Effective competition?
Conclusions




Relevance of capacities was underestimated
Today’s situation shows that Compte/Rey/Jenny
were right
Alternatives
A need for reforms ?