The rcor/agley Merger and the rgentine icuit Market: rice Increae v. Cot Reduction Germán Coloma* Thi paper analyze the behavior of the rgentine bicuit market during 2003-06 to find out whether any important merger occurred in ctober 2004 (the rcor/agley merger had any dicernible market power or cot reduction effect. Thi paper preent an econometric demand-and-upply model in which it treat the bicuit upplied by the main producer a different product. The reult how that there i an appreciable cot reduction that more than counterbalance the price increae induced by the merger. Thi implie that total conumer urplu grew a a conequence of the merger. Introduction In ctober 2004, the rgentine Commiion for the Defene of Competition (CNDC recommended the approval of a tranaction of the merger of the two of the mot important bicuit producer of rgentina, namely rcor and agley 1. few day later, the Secretary of Technical Coordination of rgentina (who wa the fficer-in-charge of approving merger accepted the opinion of the CNDC, and the tranaction wa officially approved. t the beginning of the year 2005, rcor and agley began to operate a a ingle entity, producing and marketing all their product together. efore the merger, agley wa a diviion of the French firm Danone, which operate in everal food product market in rgentina. n the other hand, rcor i an rgentine firm that produce bicuit and different kind of tidbit in rgentina and other South merican countrie. fter the merger, all the rcor and agley aet devoted to the bicuit buine in rgentina were tranferred to a newly created company, jointly owned by rcor and Danone, but olely managed by rcor. Recommending the approval of the propoed merger, the CNDC mentioned that rcor and agley faced an important degree of competition from a third bicuit producer (raft Food, whoe likely reaction, in cae the newly merged entity decided to increae it price, would be to capture a relatively large fraction of rcor and agley demand. The CNDC alo conidered unlikely that rcor/agley and raft entered into a price-fixing agreement a a conequence of the merger. The main caue for thi i the exitence of a relatively important product * rofeor and Titular of the Department of Economy, and Director of the Mater in Evaluation of roject. CEM Univerity, rgentina. E-mail: gcoloma@cema.edu.ar 1 CNDC: pinion No. 403, ctober 1, 2004 (ummary in Spanih available at www.mecon.gov.ar/cndc. 2007. The Icfai Univerity re. ll Right Reerved. The rcor/agley Merger and the rgentine icuit Market: rice Increae v. Cot Reduction 15
differentiation among the different bicuit product, which make price-fixing agreement not eay to execute or monitor. nother element that could have been conidered by the CNDC in it analyi of the rcor/agley cae i the poibility that, a a conequence of the merger, the cot of producing and marketing bicuit could be reduced, and that reduction could partially pa on to the conumer through lower price. In the hypothetical cenario in which thi reduction wa ignificant, the pot-merger price of rcor and agley product could be lower rather than higher, and that could imply that the newly merged entity increaed it market hare. f coure, when the CNDC had to evaluate the likely effect of the rcor/agley merger on the rgentine bicuit market, it could only ue pre-merger price and quantity information. fter two year of joint operation of the newly merged entity, however, we are now able to evaluate ome of the actual effect of the merger. That i what we will try to do in thi paper, uing ome price and quantity data from January 2003 to March 2006. That period include the lat two year of operation of rcor and agley a eparate firm (2003-04 and their firt 15 month a a ingle entity (2005-06. In thi paper, we will conider two main contrating hypothee that may erve to explain the change in the rgentine bicuit market that occurred in the lat two year. The firt hypothei i the idea that thoe change are baically due to an increae in the degree of market power that rcor and agley obtained a a conequence of their merger. The econd hypothei i the idea that they can be baically explained by the effect of a cot reduction in the proviion of the rcor/agley bicuit, that had an impact on the price actually et by the different firm. f coure, both phenomena could have occurred at the ame time, o in order to dientangle their relative importance, we will etimate a model in which we will eparate demand force (on which the firm could have operated to increae their degree of market power from upply force (on which poible cot reduction could have appeared. The rgentine icuit Market rgentina i a country with a relatively large per capita bicuit conumption. ccording to the data that we have obtained, the total conumption of bicuit in rgentina averaged almot 24,000 metric ton per month in 2003-06, which implie nearly 8 kilogram per capita annually 2. Several hundred of product can be found in the rgentine bicuit market. They are baically differentiated by brand and by their pecial characteritic (weetened or unweetened, alty or not alty, filled or not filled, covered with chocolate or not, etc. They alo come in package of different ize, and are old in different outlet (upermarket, traditional grocery tore, and convenience tore. ccording to the ue of the bicuit indutry, however, the three main group into which bicuit can be claified are: the group of unweetened bicuit (or cracker; the group of plain weet bicuit (that i, weet bicuit that are 2 ll the data concerning the rgentine bicuit market that we ue in thi tudy come from a proprietary data et elaborated by the conulting firm. C. Nielen. We thank Juan ablo lvarado (raft Food for having given u acce to that information. 16 The Icfai Journal of Merger&cquiition, Vol. IV, No. 2, 2007
not filled with any particular tuffing; and the group of andwich cookie (i.e. i, weet bicuit that are filled with milk caramel auce, cream, chocolate or another imilar tuffing. Thi claification i alo the one ued by the CNDC when it analyzed the likely effect of the rcor/agley merger. fter many year of evolution, that included everal merger and acquiition of mall companie by other larger producer, the rgentine bicuit market at the end of 2004 wa upplied by three major firm (rcor, agley, and raft, which accounted for nearly 75% of total ale revenue, and by a group of at leat 21 minor firm, which upplied the remaining 25%. None of thee minor firm had a market hare larger than 4%, and none of them changed it individual market hare very much in 2005-06. The relative market hare of the three major firm and the 21 minor firm i coniderably different in the different egment in which we can divide the rgentine bicuit market. From Table 1, we can ee that agley and raft have been the larget firm in the cracker egment (with a market hare of nearly 29% Table 1: rgentine icuit Market (January 2003-March 2006 Concept rcor agley raft ther Total verage rice (RS$/kg ll icuit 6.2651 7.1273 6.7583 5.6228 6.3893 re-merger 6.0472 7.0330 6.5637 5.5527 6.2700 ot-merger 6.5427 7.2607 7.0551 5.7074 6.5492 Cracker 6.1913 6.0503 6.1409 5.6540 6.0068 lain Sweet 5.9516 5.8313 6.5773 5.4046 5.8431 Sandwich 8.2669 11.2549 11.1224 8.8111 10.3609 Supermarket 4.9673 5.8772 6.0586 6.1945 5.7522 Grocery Store 6.1860 7.0489 6.5440 5.4243 6.1578 Convenience Store 8.0430 9.2687 8.2935 5.8461 7.5910 Quantitie (kg/month ll icuit 5,190,042 5,513,693 5,746,968 7,233,759 23,684,461 re-merger 4,724,372 5,250,272 5,641,070 6,426,520 22,042,234 ot-merger 5,935,113 5,935,167 5,916,404 8,525,340 26,312,024 Cracker 2,021,881 3,025,107 2,980,792 2,562,985 10,590,763 lain Sweet 2,674,630 1,293,264 2,251,141 4,394,975 10,614,010 Sandwich 493,532 1,195,322 515,035 275,799 2,479,688 Supermarket 1,516,420 1,825,032 1,975,993 805,896 6,123,342 Grocery Store 2,457,330 2,530,673 2,518,825 4,495,246 12,002,073 Convenience Store 1,216,292 1,157,988 1,252,149 1,932,617 5,559,046 Market Share (% ll icuit 21.49 25.97 25.67 26.88 100.00 re-merger 20.67 26.72 26.79 25.82 100.00 ot-merger 22.53 25.01 24.22 28.24 100.00 Cracker 19.68 28.77 28.77 22.78 100.00 lain Sweet 25.67 12.16 23.87 38.30 100.00 Sandwich 15.88 52.36 22.30 9.46 100.00 Supermarket 21.39 30.45 33.99 14.17 100.00 Grocery Store 20.57 24.14 22.30 32.99 100.00 Convenience Store 23.18 25.43 24.61 26.77 100.00 Source: wn calculation baed on Data from C Nielen. The rcor/agley Merger and the rgentine icuit Market: rice Increae v. Cot Reduction 17
each, while rcor i more important in the plain weet bicuit egment, and agley i clearly larger in the egment of andwich cookie (with a market hare of more than 52%. Taken a a whole, the minor firm are very important in the plain weet bicuit egment (with a market hare of 38.3%, but are much more irrelevant in the andwich cookie buine. Table 1 alo how the exitence of different marketing trategie concerning the ale of the bicuit. While in the upermarket channel the three major firm have a market hare of more than 85% of total revenue ale (leaded by raft, with a hare of nearly 34%, in grocery tore they only capture 67% of thoe ale (and the firm that ale more i agley, with a hare of 24%, and in convenience tore their joint hare i 73%. The different type of bicuit and marketing channel alo generate different price for the bicuit. While the average price for cracker and plain weet bicuit old to final conumer ocillated around 6 rgentine peo per kilogram during 2003-06, the average price of andwich cookie exceeded 10 RS$/kg (and wa clearly larger for agley and raft than for rcor and for the minor firm 3. rice per kilogram are alo higher when bicuit are old in convenience tore (where package are generally maller, and lower when they are old in the upermarket. Traditional grocery tore, however, are till the outlet that concentrate the larget fraction of the bicuit ale, ince they participate with more than 48% of the total revenue and more than 50% of the total volume. If we compare the pre-merger and pot-merger figure, ome intereting phenomena appear. In general, we find that the average bicuit price increaed by 4.45%, and thi i a number that i coniderably maller than the rgentine inflation in the ame period 4. The larget increae, however, appear in the average price of raft bicuit (7.47%, while the mallet increae correpond to the group of minor firm (2.79%. Figure 1 depict the behavior of all thoe average price during the whole period. In it we can ee that although the price ranking did not change (ince agley bicuit were alway the mot expenive on average, followed by raft, rcor and the other, in that order, the gap between agley and raft price clearly hortened, while the gap between the price of rcor and the minor firm increaed. In Figure 2, we have tranlated the bicuit price erie into price index erie, and compared them with the evolution of the rgentine Conumer rice Index (CI. If we look at it, we can ee that, during the firt ix month after their merger, rcor and agley tended to keep their average price relatively contant, and after that thoe price began to increae, following approximately the inflation rate. raft average price, converely, increaed at the ame rate than the CI during the whole pot-merger period, while the average price of the minor firm increaed very little during 2005-06. 3 Thee are roughly equivalent to US$2 and 3.33 per kilogram, repectively, ince the market exchange rate wa around 3 rgentine peo per US dollar during the whole period under analyi. 4 If we compare the evolution of the rgentine Conumer rice Index, for example, we find that the average CI in the period January 2005-March 2006 wa 13.65% higher than in the period 2003-04. 18 The Icfai Journal of Merger&cquiition, Vol. IV, No. 2, 2007
Figure 1: verage icuit rice by Firm RS$/kg 8.00 7.50 7.00 6.50 6.00 5.50 5.00 2003-01 2003-03 2003-05 2003-07 2003-09 2003-11 2004-01 2004-03 2004-05 2004-07 2004-09 2004-11 2005-01 2005-03 2005-05 2005-07 2005-09 2005-11 2006-01 2006-03 agley raft rcor ther Source: wn Calculation baed on Data from C Nielen. Figure 2: Evolution of icuit rice Indice by Firm 120 115 110 ae January 2005 100 105 100 95 90 85 80 2003-01 2003-03 2003-05 2003-07 2003-09 2003-11 2004-01 2004-03 2004-05 2004-07 2004-09 2004-11 2005-01 2005-03 2005-05 2005-07 2005-09 2005-11 2006-01 2006-03 agley raft rcor ther Source: wn Calculation baed on Data from C Nielen. n Econometric Model of icuit Demand and Supply The difference in the price and the quantitie traded before and after the rcor/ agley merger might be explained by everal factor. Some of them could be The rcor/agley Merger and the rgentine icuit Market: rice Increae v. Cot Reduction 19
related to change in demand due to increae in conumer income or to variation in their tate. Some other could be related to change in the cot of the input needed to produce and to market bicuit. Finally, a third group of factor could be imputed to the merger itelf, through market power or cot reduction phenomena. We decided to develop a model aimed at orting out thoe poible interrelated factor 5. The available alternative to model the demand for bicuit depended on the definition of the product that we wanted to conider. we were mainly intereted in uing demand to analyze the exercie of market power by the major bicuit firm, we decided to define the product according to the firm that upplie them. We, therefore, worked a if the rgentine bicuit market were contituted by four good, which are the bicuit upplied by rcor, agley, raft, and the other (minor firm. The demand for each of thoe product depended on the price of the four good and on conumer nominal income. ne of the mot widely ued alternative to model demand in cae like thi i the logarithmic demand pecification, that conit of etimating relationhip between the logarithm of the product traded quantitie and the logarithm of the independent variable (i.e., price and income. Thi pecification ha the advantage that it directly etimate the elaticitie of demand with repect to the independent variable, which are ueful to calculate the degree of market power that the upplying firm may poe 6. The logarithmic pecification ha the diadvantage that, when applied to a ytem of interrelated demand equation, it i not able to capture the relationhip among thoe demand that economic theory predict. In order to take care of thoe relationhip, and alo to improve the preciion in the etimation of the relevant coefficient, it i neceary to include ome retriction. ne of them i the homogeneity retriction, which tate that, for each demand equation, the um of the own-price elaticity, the cro-price elaticitie and the income elaticity mut add up to zero. nother one i the ymmetry retriction, which tate that the ratio between the Hickian cro elaticity of the i th good with repect to the price of the j th good and the Hickian cro elaticity of the j th good with repect to the price of the i th good mut equal the ratio between the conumer expenditure hare in the j th good and the conumer expenditure hare in the i th good 7. ne way to include thoe retriction in the etimation of a demand ytem, which we explored in a previou paper (Coloma, 2006, i to ue the concept of elaticity of ubtitution, which i a ymmetric meaure of the degree of conumer ubtitution between two good. pplying certain theoretical relationhip between the elaticitie of ubtitution and the Hickian cro-price elaticitie, and between thee and the Marhallian (or ordinary cro-price 5 we will ee, the model to be developed i in the tradition of the o-called new empirical indutrial organization. For a general review of the literature embedded in that tradition, ee Martin (2002, chapter 7. 6 ther poible alternative to model demand in cae like thi are the o-called flexible functional form. Thee are, for example, the tranlog demand ytem, originally propoed by Chritenen, Jorgenon and Lau (1975, the lmot Ideal Demand Sytem (IDS, created by Deaton and Muellbauer (1980, and the Quadratic lmot Ideal Demand Sytem (QUIDS, developed by ank, lundell and Lewbel (1997. 7 For a theoretical explanation of thee retriction and it implication for empirical analyi, ee arten (1993. 20 The Icfai Journal of Merger&cquiition, Vol. IV, No. 2, 2007
21 The rcor/agley Merger and the rgentine icuit Market: rice Increae v. Cot Reduction elaticitie and the income elaticitie, it i poible to write the logarithmic demand of the different product a function whoe coefficient are the own-price Marhallian elaticitie and the elaticitie of ubtitution. For our cae of four good whoe demand depend on four price and income, thi procedure i able to reduce the number of elaticity coefficient to etimate from 20 to 10, while incorporating at the ame time the homogeneity and ymmetry retriction predicted by economic theory. eginning from thi initial logarithmic pecification for the demand of rcor, agley, raft, and ther bicuit: ln(y Q ln( Y α...(1 ln(y Q ln( Y α...(2 ln(y Q ln( Y α...(3 ln(y Q ln( Y α...(4 where Q, Q, Q and Q are the correponding quantitie;,, and are the average product price; and Y i the conumer nominal income; we can reach the following final pecification: ln(y Q ln( α ln(y ln(y ln(y...(5 ln(y Q ln( α ln( ln( ln( ln(y ln( ln(y ln(y...(6 ln(y Q ln( α ln(y
ln(y ln(y...(7 ln( Q α ln(y ln(y ln(y ln(y ln(...(8 where S, S, S, and S are the expenditure (or revenue hare of the four product under analyi. Note that, while in the tandard logarithmic demand pecification the coefficient to etimate are the own-price Marhallian elaticitie (,,, and, the cro-price Marhallian elaticitie (,,,,,,,,,,, and and the income elaticitie ( Y, Y, Y, and Y, in the modified model the etimated coefficient are the own-price Marhallian elaticitie and the elaticitie of ubtitution between good (,,,,, and. In order to do thi, the variable included in the regreion have to be modified, and they become function of the price, the nominal income and the revenue market hare of the different good. The etimated own-price Marhallian elaticitie are ueful to meaure the degree of market power that each of the major bicuit producer poee. uming that each of thoe producer price it good trying to maximize it profit, it relative margin between price and marginal cot hould be equal to the invere of the abolute value of it own-price Marhallian elaticity. However, due to the fact that our etimation ue monthly data from a relative hort period of time, what we are able to etimate when running the regreion are the hort run demand elaticitie for each of the firm. To find the correponding long run elaticitie, we have to approximate a meaure of the erial correlation coefficient for the etimated demand ( ρ, and ue it to calculate the following parameter: ε 1 ρ ; ε 1 ρ ; ε 1 ρ ; ε...(9 1 ρ where ε, ε, ε and ε are the long run own-price Marhallian elaticitie for the bicuit upplied by rcor, agley, raft and the other producer, repectively. 22 The Icfai Journal of Merger&cquiition, Vol. IV, No. 2, 2007
The correponding profit-maximizing price/cot margin for rcor, agley and raft are therefore the following 8 : MC 1 ρ ; MC 1 ρ ; MC 1 ρ...(10 and thee relationhip between price, marginal cot, elaticitie and erial correlation coefficient can alo be written a: MC 1 ρ ; MC 1 ρ MC 1 ρ...(11 The expreion that appear on equation 10 and 11, however, are valid a long a rcor, agley and raft are independent firm that maximize their profit individually. fter the rcor/agley merger, however, the rcor and agley became a ingle entity whoe profit-maximizing price/cot margin could be approximated by the following expreion: MC 1 ρ ; MC 1 ρ...(12 where i the own-price hort run Marhallian elaticity of the compoite commodity formed by the aggregation of rcor and agley bicuit. In order to calculate that elaticity, it i neceary to etimate a demand for that compoite commodity. Following the methodology ued to etimate the other demand, we can write that: ln( Q Q α M M ln(y M ln(y ln(y M...(13 where M i the average price of rcor and agley bicuit (which i equal to.q.q /(Q Q. ( The expreion for and that appear on Equation 11, therefore, have to be re-written in the following way: MC 1 ( 1 M ρ 1 M ρ ; 8 Note that thi reaoning cannot be applied to the profit-maximizing price/cot margin of the other (minor producer. Since thoe producer are a heterogeneou group of mall firm whoe individual demand are not pecified in our model, we will not analyze their behavior a upplier. The rcor/agley Merger and the rgentine icuit Market: rice Increae v. Cot Reduction 23
MC ( 1 M 1 ρ 1 M ρ...(14 where M i a dummy variable whoe value i equal to zero in the pre-merger period (2003-04 and equal to one in the pot-merger period (2005-06. In order to etimate the coefficient of the propoed model, it i neceary to run a ytem of regreion formed by the demand Equation 5, 6, 7, 8 and 13, and by the upply price implied by Equation 11 and 14. Thoe upply price have to be regreed againt ome variable that help to explain the behavior of the firm marginal cot, which could be, for example, the price of flour ( F and the regitered private ector wage index (W 9. uming a linear relationhip between thoe variable and the marginal cot, the correponding upply price equation for rcor, agley and raft can be written in the following way: ( 1 M M ( β β β W γ M F F W 1 ρ 1 ρ...(15 ( 1 M M ( β β β W γ M F F W 1 ρ 1 ρ...(16...(17 ( β βf F βw W 1 ρ where β F and β W are the parameter that meaure the effect of input price on the firm marginal cot (which are aumed to be identical for the three major firm, and γ and γ are the parameter that meaure the change in the marginal cot of rcor and agley a a conequence of efficiencie imputable to their merger 10. The ytem of equation to be regreed, therefore, conit of five logarithmic demand equation (5, 6, 7, 8 and 13 and three upply price equation (15, 16 and 17. eing a demand-and-upply model, we conidered price (,,, and M, quantitie (Q, Q, Q, and Q and market hare (S, S, S, and S a endogenou variable, while Y, F and W were conidered to be exogenou. We alo ued a et of additional (intrumental exogenou variable, formed by 11 monthly dummy variable, three annual dummy variable, and the rgentine conumer price index. In order to exploit poible correlation among the reidual of the etimated equation, we ued iterative three-tage leat quare (3SLS a our etimation method. Thi i a method that combine the ue of intrumental variable with the etimation of a matrix of correlation coefficient between the different equation. We alo aumed the exitence of 9 We have alo tried to ue other variable, uch a the price of milk, the price of vegetable oil, the price of ugar, the price of chocolate, the price of electricity, the price index of machine ued for the production of food and beverage, the index of capacity utilization in the indutry of food and beverage, the conumer price index, and the wholeale price index. None of them improved our reult, and we ended up with a pecification that wa baed olely on the behavior of F and W. 10 Thi way to analyze the effect of a merger on price and cot i typical of the o-called clinical econometric tudie of merger. For a review of everal tudie of thi ort, and alo for the decription of alternative empirical technique, ee autler (2001. 24 The Icfai Journal of Merger&cquiition, Vol. IV, No. 2, 2007
an autoregreive proce of the R(1 type, which allowed u to etimate the erial correlation coefficient ρ. Etimation Reult The data et that we ued to perform the etimation of the model decribed earlier conited of 39 monthly obervation from January 2003 to March 2006. rovided that we are running a ytem of eight different equation, the total number of obervation i equal to 312. For each month, we had the price, quantity, and market hare data for rcor, agley, raft and the other (minor bicuit producer, whoe ource i the ame databae that we ued in the rgentine icuite Market, elaborated by the conulting firm C Nielen. The data et wa completed with ome public information elaborated by the rgentine Intitute of Statitic and the Cenu (INDEC, which baically conit of indice uch a the CI, the monthly Economic ctivity Etimator (EME, the index of the price of flour and the regitered private ector wage index. Uing the CI and the EME, we elaborated a monthly index of conumer nominal income, which wa the etimator of the variable Y. The reult of the etimation performed, following the methodology decribed earlier, can be een in Table 2 11. Table 2: Demand and Supply Regreion Reult Variable/Reult Coefficient Std. Error t-tatitic robability Logarithmic Demand Equation Contant rcor 13.0750 0.0383 341.3779 0.0000 Contant agley 13.2521 0.0377 351.8376 0.0000 Contant raft 13.2524 0.0398 333.1976 0.0000 Contant ther 13.2792 0.0391 339.3242 0.0000 Contant rcor/agley 13.8672 0.0381 364.0985 0.0000 wn-price Elaticity rcor 0.9444 0.0098 96.4261 0.0000 wn-price Elaticity agley 0.9322 0.0098 94.8685 0.0000 wn-price Elaticity raft 0.9324 0.0099 93.7778 0.0000 wn-price Elaticity ther 0.9299 0.0096 96.6865 0.0000 wn-price Elaticity rcor/agley 0.8672 0.0098 88.2824 0.0000 Elat Subtitution Major 1.0084 0.0099 101.3729 0.0000 Elat Subtitution Major/ther 1.0087 0.0096 104.6593 0.0000 Serial Correlation 0.7015 0.0286 24.5309 0.0000 Supply rice Equation Contant rcor 2.6910 0.2293 11.7375 0.0000 Contant agley 3.2693 0.2473 13.2184 0.0000 Contant raft 3.0277 0.2431 12.4565 0.0000 rice of Flour 0.0020 0.0007 2.9509 0.0034 Wage Index 0.0078 0.0010 7.4566 0.0000 Dummy Merger rcor 0.1596 0.0439 3.6355 0.0003 Dummy Merger agley 0.2168 0.0454 4.7720 0.0000 Serial Correlation 0.7916 0.0506 15.6580 0.0000 11 Note that, to reduce the number of coefficient to etimate, we aumed that all the coefficient that meaure elaticitie of ubtitution between the major firm (rcor, agley and raft were identical, and we alo ued a ingle coefficient to meaure the elaticity of ubtitution between any of thoe firm and the other firm. The erial correlation coefficient for the five demand equation, moreover, were aumed to be the ame, and we alo etimated a ingle erial correlation coefficient for the three upply price equation. The rcor/agley Merger and the rgentine icuit Market: rice Increae v. Cot Reduction 25
If we look at the reult in Table 2, we find that all the etimated coefficient are tatitically ignificant at a 1% probability level. They alo diplay the right ign in all cae, ince the five etimated own-price elaticitie are negative, the two elaticitie of ubtitution are poitive, the two erial correlation coefficient are number between 0 and 1, the two input price parameter are poitive, and the two merger-pecific cot parameter are negative (i.e., they indicate that the merger generated a reduction in rcor and agley marginal cot. We alo find that the demand equation contant for the minor firm i lightly higher than the demand equation contant for raft and agley, and that thoe contant are in turn higher than rcor. Thi i conitent with the fact that, taken a a group, the minor firm have a market hare which i lightly higher than raft and agley, which in turn have larger market hare than rcor (Table 1. n the upply price equation, the contant for agley i higher than the contant for raft, which i in turn higher than the contant for rcor. Thi i conitent with the fact that, during the period under analyi, agley average price wa higher, followed by raft and rcor (Table 1. Uing the coefficient reported in Table 2, and the average market hare reported in Table 1, it i poible to calculate the implied long run Marhallian elaticitie for the product conidered in the etimation. Thee are the one that appear in Table 3. Note that thee elaticitie fulfill the homogeneity retriction (ince, for each product demand equation, they add up to zero. They alo fulfill the ymmetry retriction, ince they are baed on ymmetric elaticitie of ubtitution 12. Table 3: Etimated Long Run Demand Elaticitie Equation/Variable rice rcor rice agley rice raft rice ther Nominal Income rcor Demand 3.1643 0.2594 0.2564 0.2687 2.3798 agley Demand 0.2115 3.1234 0.2526 0.2648 2.3945 raft Demand 0.2135 0.2580 3.1239 0.2673 2.3851 ther Demand 0.2109 0.2549 0.2520 3.1158 2.3980 rcor agley Demand 2.9055 2.9055 0.2561 0.2684 2.3810 Table 4: Etimated verage rice/cot Margin (% Firm re-merger ot-merger rcor 31.60 34.42 agley 32.02 34.42 raft 32.01 32.01 Uing the figure that appear on Table 3, it i poible to calculate the profit-maximizing price/cot margin for rcor, agley and raft, both before and after the rcor/agley merger. Thee are the one reported in Table 4. The etimation performed by running the demand-and-upply econometric model are ueful to make ome comparion between pre-merger and pot-merger market behavior. For example, a we know that the average pot-merger bicuit price for rcor and agley are equal to 6.5427 and 7.2607 RS$/kg, repectively (Table 1, we can alo etimate that their correponding pot-merger marginal cot are equal to 4.2907 and 4.7616 RS$/kg (provided that their price/cot 12 Note that the ymmetry retriction doe not imply that the Marhallian cro-price elaticitie are ymmetric. Thi i becaue thoe elaticitie alo depend on the value etimated for the income elaticitie and on the average market hare, which are not identical for the different product. 26 The Icfai Journal of Merger&cquiition, Vol. IV, No. 2, 2007
margin i equal to 34.42%, a reported in Table 4. If rcor and agley had not merged, however, thee marginal cot would have been higher, by a um equal to 0.1596 RS$/kg for rcor, and equal to 0.2168 RS$/kg for agley (Table 2. n the other hand, their price/cot margin would have been lower, and equal to 31.60% for rcor and 32.02% for agley (Table 4. The etimated average price for the 2005-06 period if rcor and agley had not merged, therefore, would have been equal to 6.5036 RS$/kg for rcor and 7.3233 RS$/kg for agley. Thee figure imply that rcor price increaed by 0.6% and agley price decreaed by 0.85% a a conequence of the merger. Uing the figure calculated in the previou paragraph, it i poible to etimate the change in conumer urplu that occurred a a conequence of the rcor/agley merger. rovided that the average monthly bicuit quantity old by rcor in the pot-merger period i equal to 5,935,113 kg, and the average monthly bicuit quantity old by agley in the ame period i 5,935,167 kg (Table 2, then the etimated price change generated a reduction in rcor conumer urplu of RS$ 232,063 per month, and an increae in agley conumer urplu of RS$ 371,541 per month (that i, a monthly net gain of RS$ 139,478. nother figure that merit calculation a an etimation exercie i the total amount of the productive efficiency gain detected. Thee are equal to RS$ 947,244 per month for rcor and RS$ 1,286,744 per month for agley (i.e., a total monthly gain of RS$ 2,233,988. Thee figure appear when we multiply the etimated marginal cot reduction by the actual quantitie traded during 2005-06. Concluion The analyi ugget that the deciion of the rgentine competition authoritie concerning the approval of the rcor/agley merger wa in general correct, ince the behavior of the rgentine bicuit market after that merger wa conitent with a ituation in which competition did not uffer from the increae in market concentration that the merger implied. Looking at the main figure of the market, we ee that the average price of bicuit in rgentina wa lightly higher in 2005-06 than in 2003-04, but that price increae wa coniderably maller than the rgentine inflation rate. We alo ee that the total monthly bicuit conumption increaed by 19.4% in the pot-merger period, and that the aggregate market hare of the rcor/agley group increaed from 47.39% to 47.54%, while the market hare of it main competitor (raft Food decreaed from 26.79% to 24.22% (Table 1. The caue why the market performed in that way, however, i not exactly the ame that the rgentine competition agency (i.e., the CNDC predicted when it recommended the merger to be approved. Thi i becaue the degree of market power of rcor and agley eem to have increaed in comparion to it pre-merger level, due to a change from a ituation in which they faced demand, whoe long run own-price elaticitie were equal to 3.1643 and 3.1234, repectively, to a ituation in which they face a demand whoe long run own-price elaticity i equal to 2.9055 (Table 3. Thi reduction in their own-price The rcor/agley Merger and the rgentine icuit Market: rice Increae v. Cot Reduction 27
elaticity implie that the firm have now the poibility of charging higher price/cot margin which, abent any cot reduction, would have implied long run price increae of 4.3% for rcor bicuit and 3.7% for agley bicuit 13. ut the merger between rcor and agley eem to have generated ome important productive efficiency gain that were partially paed on to the conumer, and thoe gain eem to have more than counterbalanced the market power increae, epecially for the cae of agley product. That i why total conumer urplu eem to have grown a a conequence of the merger, at leat during the firt fifteen month of operation of the newly merged entity. The reult obtained in the tudy, however, are dependent on the data that we ued to find them. It i, therefore, poible that, with data from other period of time, ome of thee reult are altered. Notwithtanding, the methodology that we ued to find the reult i relatively general, in the ene that it can be applied to other cae and cenario to tet for the exitence of market power and cot reduction effect generated by any merger that occur in a particular differentiated product market. It i alo more effective than the methodologie baed on the obervation of accounting cot data, ince it i able to eparate cot change that are imputable to input price change from cot change that are imputable to the merger itelf. Reference Reference #31J-2007-06-02-01 1. ank Jame, Richard lundell and rthur Lewbel (1997, Quadratic Engel Curve and Conumer Demand, Review of Economic and Statitic, Vol. 79, pp. 527-539. 2. arten nton (1993, Conumer llocation Model: Choice of Functional Form, Empirical Economic, Vol. 18, pp. 129-158. 3. Chritenen Laurit, Dale Jorgenon and Lawrence Lau (1975, Trancendental Logarithmic Utility Function, merican Economic Review, Vol. 65, pp. 367-383. 4. Coloma Germán (2006, Etimation of Demand Sytem aed on Elaticitie of Subtitution, Working aper #322; CEM Univerity, ueno ire, rgentina. 5. Deaton ngu and John Muellbauer (1980, n lmot Ideal Demand Sytem, merican Economic Review, Vol. 70, pp. 312-326. 6. Martin Stephen (2002, dvanced Indutrial Economic, 2 nd Edition. xford, lackwell. 7. autler aul (2001, Evidence on Merger and cquiition, FTC ureau of Economic Working aper #243, Federal Trade Commiion, Wahington DC. 13 Note that thee predicted price increae, however, are maller than 5%, which i the threhold that mot competition authoritie around the world ue when they evaluate the poible prohibition of a merger. 28 The Icfai Journal of Merger&cquiition, Vol. IV, No. 2, 2007