The Coca Cola Company, a Threat for Competition? Essay Example

dominant position which can make the situation unfair. PepsiCo (Pepsi) accused TCCC of abusing this particular power to drive them out of the market (Economist, 1999). This led to an interference of the European Commission (EC).TCCC and its bottlers agreed to make commitments for several practices and on June 22, 2005 the EC made these commitments binding (European Commission, 2005b).

The question arises whether The Coca Cola Company used its dominant position in such a way that the competition on the market was intolerably limited. First the market discussed in the case will be specified. It will become clear that the market was limited by the EC for several reasons. Secondly this paper will identify the key economic issues and elaborate on the impact these issues have on competition, more specific, why the EC thought they were harming competition.

At last this paper will weigh up the economic arguments used by the EC and form a judgement. 1. Market specification 1. 1 Distinction within the market In its investigation the EC specified the relevant market on which it will base its research. As said in the introduction the most important submarket of the non-alcoholic beverage market is the carbonated soft drinks (CSDs) market. Consequently all the energy drinks, flavoured or non-flavoured water, juices etc.

are excluded from the case. According to the EC (2005) the market was limited for two reasons.First, the CSDs have one very common characteristic namely that they are carbonated and usually have a sweet taste which is suggested by the EC to mainly attract younger customers. Second, the fact that there were differences in prices, volumes traded, and the preferences of consumers

with regard to substitution on this particular market made it plausible for the EC to make a distinction between the market for CSDs and the remainders (European Commission, 2005a).

This is reasonable because TCCC holds his dominant position mainly on the CSD market (The Beverage Digest, 2006).Another important distinction the EC made was the difference between the take-home distribution channel and the on-premise distribution channel. The first one defines the sales to the customers for consumption at home, for example supermarkets. The latter defines the sales for consumption on the premise, for example restaurants and amusement parks. Not only is the on-premise channel often accompanied with the provision of additional services, but also considerable price differences and other structural differences were reasons to separate the CSD market into the two different subgroups named above.At last the markets were identified as national by the EC.

Again this was based on a difference between prices, preferences and the organizational structure (European Commission, 2005a). 1. 2 Market dominance of The Coca Cola Company Before TCCC can be accused for the abuse of its power derived from its dominant position, it has to be actually proven that TCCC has a dominant position in the market. The EC (2005) had three arguments for the dominance of TCCC.

First, The EC concluded that “TCCC and its respective bottlers have the power to adapt a common market policy and to present themselves from an economic point of view […] as a collective entity” (European Commission, 2005a, p. 5). In other words, despite TCCC and its bottlers are individual companies, they can be regarded as one force on the market because they are linked

to each other. Secondly, TCCC has high market shares in 16 of the 25 member states of the European Union (EU) (European Commission, 2005a).

According to the Beverage Digest (2006) in 2005, Pepsi had a market share of 31. 4% and TCCC had a market share of 43. 1%. Thirdly, the EC concluded that the entry barriers for the market were too high.

According to the EC (2005) these high entry barriers were linked to the dominant position of TCCC. Now there is enough evidence to prove the dominant position of TCCC. However it is still not yet clear whether TCCC really abused its position. The EC found several practises inside the organisation of TCCC which were a violation of the EU’ competition policy.These will be discussed in the next section. 2.

Key economic issues The key element in competition policy is the fact that welfare will be lost when markets are not in equilibrium. One reason for markets not to be in equilibrium is that the price charged by the producers does not equal the equilibrium price. This has as a consequence that the quantity traded on the market does not equal the equilibrium quantity. In this situation we get a deadweight loss (Perloff, 2007).

This paper will now present some issues hich, according to the EC, were a threat for competition and society as a whole. As said in the previous section TCCC and its bottlers conducted a common strategy and thus had several common practices that according to the EC (2005) could be divided into three different groups, namely: “exclusivity and exclusivity related practices, growth and target rebates, and bundling practices”. The main

problem with regard to exclusivity is the foreclosure of rival suppliers. The EC found evidence of this activity mainly in the on premise channel.

There are several examples of this conduct. TCCC made agreements with its customers to only sell TCCC related products. Financing agreements, in which the customer would repay its debt by buying products rather than paying money, could also make it difficult for rivals to compete. One last example is the (partly) free provision of technical equipment to customers. These provisions were accompanied with several agreements that would ensure exclusivity of TCCC (European Commission, 2005a).Growth and target rebates were given to customers when they reached a certain amount of purchase amounts.

However, middle-sized customers were likely to not be able to purchase such an amount. So, these customers would suffer a significant loss compared to their larger rivals (European Commission, 2005a). According to the EC (2005) growth and target rebates reduces consumers’ choice and the downward pressure on prices due to the fact that there is less competition because of the increasing switching costs for customers.The last issue, bundling practises, consist of making it unattractive or impossible for a customer to buy a certain popular product without buying other particularly less popular products.

The main concern is again the downfall in the variety of choice for consumers and the absence of downward pressure on the prices. Examples are tying, assortment and range provisions, and space to sales arrangements (European Commission, 2005a). With regard to these preliminary concerns raised by the EC, TCCC and its bottlers made some commitments.TCCC committed to make no more exclusivity agreements, to give no more target and growth rebates,

not to use Coca-Cola’s strongest brands to sell less popular products, and to permit customers to use 20% of the beverage coolers free space for rival products.

These commitments were made binding by the EC (European Commission, 2005b) 3. Economic analysis The deadweight loss to society because of disturbance of the perfect competition equilibrium is a pure theoretical assumption of economists. It is a model, in other words the principle of ‘ceteris paribus’ is used.Some essential elements are left outside reasoning.

As Wehmhorner (2006) has described there is always a trade-off between static inefficiency, as described in the model above, and dynamic efficiency. Higher returns will make the investment climate more attractive. On the other hand more competition will make the dominant firm on the market more aware of the fact that they need to innovate (Baker, 2003). It really depends on the situation on the market whether a specific monopolistic conduct is that devastating for society.As described in the report of the EAGCP (2005) it is not the monopolistic conduct per se which causes the anticompetitive harm but the effects accompanied with the conduct. The group calls for an effects-based approach rather than a form-based approach to competition related problems.

With regard to the first practice which raised concern by the EC, that of exclusivity, the EAGCP (2005) argues that when no third party is involved and hurt by the conduct there will be no anticompetitive effects.However, in this situation there is a third party involved (PepsiCo) and this party is hurt by the exclusivity practices of TCCC. In the report of the EAGCP (2005) there are several dynamic efficiency arguments. Excluding inferior retailers

and preventing excessive entry are both not relevant for this case.

The exclusion of inferior retailers is provided by the market itself because expensive brands like ‘Coca Cola’ will not be bought by discount retailers such as ‘Aldi’ since that does not fit their profile.Preventing excessive entry is not needed in the CSD market because the sunk costs made in the market will account for all companies, therefore there will not be a “business stealing effect” (EAGCP, 2005, p. 48). The only plausible argument for dynamic efficiency is the retailer loyalty.

However the trade-off made by the EC between the strong anticompetitive effects of exclusivity (the static inefficiency) and the retailer loyalty (the dynamic efficiency) is more than justified.A good argument is the fact that TCCC already has a significant retailer loyalty because of its strong brand name. Growth and target rebates make it difficult for rivals to compete, especially when they have not the financial power to make a reasonable offer to the customers. So, the customer is tied to TCCC because for the individual customer it would be expensive to buy more from a different supplier. Moreover smaller rivals are driven of the market because they can not match TCCC rebates (European Commission, 2005a).

Dynamic efficiency with regard to rebates is not feasible to assume in this case. According to the European Commission (2005a) bundling practices will lead to a smaller choice for the final consumer and no downward pressure on prices. Customers are more or less forced to buy from the same supplier and consequently will have fewer resources left to buy other products. This explains the decline in the variety of choice.

Although bundling practices can decrease the customers’ transaction costs, this will be irrelevant within the take-home channel (EAGCP, 2005).Within the on-premise channel transaction costs are far more important, so it can be argued that in this area bundling practices can be allowed to a certain extent. The trade-off has to be made between the negative effects of a decline in consumers’ choice and higher prices, and the fewer transaction costs for the customers. In other words, the trade-off between static inefficiency and dynamic efficiency has to be made once again.

Conclusion It is safe to say that TCCC abused its dominant position to such an extent that competitors in the market were hurt by its conduct.In all the different practices of TCCC which raised concern within the EC, the static inefficiency did more harm than the dynamic efficiency could make up for. The EC made an economically feasible decision to make the commitments given by TCCC and its bottlers binding. This decision will certainly make the CSD market more competitive References Baker, J. B. (2003, Autumn).

The case for antitrust enforcement. The Journal of Economic Perspectives, 17 (4) Retrieved 2 December 2006 from: http://links. jstor. org/sici? sici=0895-3309%28200323%2917%3A4%3C27%3ATCFAE%3E2. 0. CO%3B2-%23 The Economist (1999).

Going for Coke. August 12th 1999.