Merger Theory and Evidence: The Baby-Food Case Reconsidered

Richard Dagen and Daniel Richards (dan.richards@tufts.edu)

No 602, Discussion Papers Series, Department of Economics, Tufts University from Department of Economics, Tufts University

Abstract: The Federal Trade Commission’s successful challenge to the proposed merger of Heinz and Beech-Nut baby food operations in 2001 remains a controversial case that raises concern over the role of cost efficiencies in merger analysis. Although the FTC argued that the merger would result in an increased likelihood of coordinated effects, we develop an alternative explanation for why the merger was likely to harm consumers even in the absence of such cooperation. We show that a conventional model of vertical product differentiation is able to replicate the premerger market data. Vertical product differentiation assumes that consumers agree on the relative quality of different products, which seems to describe the baby food market. When the model is then used to determine potential post-merger outcomes, we find that only using the most favorable assumptions for Heinz, would the claimed cost-efficiencies have been passed on to consumers. Under any more conservative and realistic scenarios, consumer prices rise substantially. The analysis supports the decision to oppose the merger. It also raises some doubt about the merit of cost efficiencies as a merger defense when an industry is characterized by vertical product differentiation.

Date: 2006
New Economics Papers: this item is included in nep-com and nep-ind
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