Proctor and Gamble Case and Origin of Entrenchment Theory

“Entrenchment” was the most important theory of harm, by which anticompetitive effects can occur due to an increase in economic power, particularly in terms of financial power and its consolidation by the use of brand names. Firstly, the other competitors would reduce their competitive activities since they would fear cut prices or other retaliatory measures by the dominant company as a result of the increase in resources. As such expectations would dissuade other companies from entering the market, such increase in potential acted as an additional barrier to market entry. A leading case for the entrenchment doctrine is the Procter and Gamble / Clorox case. In 1957 Procter and Gamble, a manufacturer of many household products with the largest advertising budget in the USA at the time, acquired Clorox, the dominant company in the manufacture of household bleach products. In 1967 the Supreme Court ruled that Procter and Gamble’s large advertising budget, in particular, led to corresponding deterrent effects in the market for household bleach products.⁷

According to the second theory of harm anticompetitive effects can occur as a result of diminishing potential competition. The theory has two variants. One is that the “actual potential “competition would be reduced if the acquirer could have entered the market in a manner less harmful to competition (e.g. by acquiring a smaller competitor or by its own investments). The “perceived potential “competition would be reduced if the acquirer was previously perceived by the established competitors as a potential competitor and had thus limited the scope of action.⁸

According to the third theory of harm a conglomerate merger can create anticompetitive effects through reciprocity dealings. Accordingly, both parties to the merger could induce their customers or suppliers to transact future business with the respective other merging partner. Such tying practices could create market foreclosure effects in a similar way as vertical mergers. The leading case here is Consolidated Foods / Gentry. In this case the food company Consolidated Foods in 1951 acquired the second largest manufacturer of onion and garlic powder, Gentry. Consolidated Foods requested its suppliers, with some success, to purchase Gentry

Assessment under the European Union

In 1989, the EC stated in its Annual Report that ‘‘conglomerates can, more readily than other enterprises, adopt predatory strategies by using their financial (...) forbearance: where conglomerate firms have an overlapping presence in a range of markets, they may be reluctant to compete against each other.”⁹

Concerns about conglomerate effects have been raised by the Commission in early decisions like Tetra Pak/Alfa-Laval and it was a motive behind the first (ever) prohibition of a merger in ATR/de Havilland.

A number of prohibitions in the EU have however been based almost exclusively on conglomerate effects (in particular Tetra Laval/Sidel and General Electric/Honeywell). In other cases, significant remedies, involving divestitures, have been imposed by the Commission in order to alleviate concerns of conglomerate effects (for instance in Guinness/Grand Metropolitan or SEB/Moulinex).

Decisions on both Tetra Laval/Sidel and General Electric/Honeywell were appealed. In the case of Tetra Laval/Sidel, the Commission decision was annulled by the Court of First Instance (CFI). The decision by the CFI was further appealed to the European Court of Justice (ECJ) by the Commission. The Court did not only reaffirmed the decision of the CFI but also made important pronouncement on the standards of proof and review that should apply in merger control decisions and specifically in cases where conglomerate effects have been alleged.

General Electric/Honeywell lead to bitter exchange between the EU and US authorities, which had cleared the deal3. The decision was confirmed by the CFI but importantly, the analysis of the conglomerate effects undertaken by the Commission was annulled (and the prohibition thus eventually rests on minor horizontal overlaps).

In all of these instances, the economic analysis undertaken by the European Commission has been a central element of the controversy whether in Court or in public debate the Commission found that carton packaging machines and PET packaging machines belonged to different antitrust markets. Tetra Laval held a dominant position in the carton packaging segment whereas Sidel held a “leading” position (around 60 %) in one segment of the PET packaging market, namely the market for Strech-Blow Moulding (SBM) machines. The Commission focused on the so-called sensitive markets for which both carton and PET packaging are used (namely juice, fruit flavored drink, tea and coffee based drinks and milk).

The use of PET in those markets was small (in particular for milk and juice – the two important segments in quantitative terms) but was expected to grow and it accounted for about 5 % of total PET sales (see figure 1 for an overview of the packaging market).

GE-Honeywell Case

In 2001 the merger between General Electric and Honeywell was notified to the Department of Justice as well as the Commission. Whereas the Department of Justice had no competitive concerns about the merger, it was prohibited by the Commission. GE is a major supplier of jet engines for commercial airlines, Honeywell is a manufacturer of aircraft components and jet engines for smaller aircraft. In the Commission decision horizontal overlaps and vertical market foreclosure effects played only a secondary role. In the Commission’s view the conglomerate effects of the merger, in particular, were of concern.

In its view GE and Honeywell would jointly have been in a position after the merger to improve their market position in the respective markets through tying and bundling strategies. In the markets for aircraft components, in which Honeywell was mainly active as a strong but not dominant company, the merger could have enabled the conglomerate to provide bundles of components and jet engines with significant discounts. In the light of GE’s outstanding financial power, which would make a cross-subsidization of components probable, the conglomerate would have a competitive advantage over non-integrated competitors. In the Commission’s view this would also offer it the possibility in the short or medium term to develop technically coordinated components. GE / Honeywell would then be in a position to transfer GE’s existing dominant position to Honeywell’s markets. The result would be falls in profit for competitors and market exits, which ultimately would considerably reduce competition in these markets. In the markets for the manufacture of turbines, in which GE is already dominant, the merger would strengthen this position of dominance since tying transactions are likely to have market foreclosure effects. As the competitors would not be able to counter this strategy competitively this would strengthen GE’s dominant position.

The EU guidelines¹⁰ on Non – Horizontal Mergers defines a conglomerate merger as a merger between firms that neither compete in the same market nor operate in the different levels supply chain.¹¹ In the Commission’s opinion such a merger may lead to coordinated as well as non-coordinated effects in the form of foreclosure. As such, these theories of harm—which the U.S. federal antitrust authorities have abandoned since the early 1980s¹²—continue to play an important role in the European Union competition law.

Despite abandoning the merger project following prohibition the parties to the merger took legal action against the Commission’s decision. The Court of First Instance rejected the appeal because the prohibition was already justified by the horizontal and vertical effects of the merger. However, as regards the conglomerate effects, the Commission had failed to prove the creation or strengthening of a dominant position.

The Commission had therefore only signified the possibility of a tying strategy in its prohibition decision. In doing so it had failed to prove whether such a strategy was likely as a result of the economic incentives of the parties to the merger. In the court dispute this issue became the subject of controversial discussion. Irrespective of a conclusive evaluation of the individual arguments the court saw this as an indication that the Commission had not furnished proof of this and had omitted to prove that the effects it claimed were a direct, logical and probable consequence of the merger. In evaluating the conglomerate effects the Commission had thus made obvious errors.

E.U Non Horizontal Guidelines

The Non-Horizontal Guidelines serve as evidence that the European Commission is now even less skeptical about non-horizontal mergers than it was before. This attitude toward non-horizontal mergers corresponds to the U.S. approach, where vertical and conglomerate mergers have generally been considered as competitively insignificant since the early 1980s.¹³

In order to constitute a violation of the Guidelines, the merger must ultimately harm consumers in the downstream market.¹⁴ Such harm may be caused by increasing the costs of downstream rivals—leading to an upward pressure on their sales prices—or by raising the barriers to entry, thus eliminating the competitive pressure exerted by potential competitors.¹⁵ Raising the rivals’ costs, however, can only harm consumers if the foreclosed competitors play a significant role in the competitive process on the downstream market. In particular, this occurs if the rivals have high market shares, if they are close competitors of the merged firm or if they are particularly aggressive competitors.¹⁶ Raising the barriers to entry, on the other hand, can deter potential competitors from entering the downstream market by making it necessary to enter at both the downstream and the upstream level in order to compete effectively.¹⁷ That notwithstanding, it is highly unlikely that prices will rise after the merger if there are enough competitors constraining the merged firm.

The European Commission has made it clear in its new Non-Horizontal Merger Guidelines that the enhancement of the customer welfare is the primary objective of European merger control.

Indian Approach

The Competition Act, 2002 aims to promote competition and protect the Indian markets against anti-competitive practices. The act prohibits anti-competitive practises, abuse of dominant position and regulates combinations (mergers and acquisitions) with a view to ensure that there is no appreciable adverse effect on the competition in India.

In terms of section 5 of the Competition Act, 2002, a “combination” includes:

(1) The acquisition of control, shares or voting rights or assets by a person;

(2) The acquisition of control of an enterprise where the acquirer already has direct or indirect control of another engaged in identical business; and

(3) A merger or amalgamation between or among enterprises, that cross the financial thresholds set out in Section 5 of the Competition Act.

Assets + Turnover Thresholds

The individual triggering thresholds for combinations, given under section 5 of the Act, are in terms of joint asset base of 1500 crore* rupees or turnover of 4500 crore rupees in India; or assets of US$750 million (including assets of at least 750 crore.

The provisions relating to regulations of combinations (MandAs) in the Competition Act, 2002 (Act) were notified by the Government of India on March 4, 2011 to come into force from June 1, 2011. The main enforcement provisions of regulation of combinations are given under sections 5, 6 ,20 ,29,30 and 31 of the Act.

Threshold criterions under the Act (Table)

Group Status	Geographical Coverage	Threshold
No Group	India	Assets:Rs.1500crore Turnover: Rs.4500 crore
	Worldwide	Assets:US$^*750million (including at least in India Rs 750 crore) Turnover:US$2250million (including at least in India Rs.2250 crore)
Group	India	Assets: Rs.6000 crore Turnover: Rs.18000 crore
	Worldwide	Assets:US$3 billion(including at least in India Rs 750 crore)

Regulation 4 of the Combinations Regulations provides for a Schedule I which contains a list of categories of transactions which ordinarily are not likely to have any competitive impact and, therefore, in such cases the parties need not make filing to the Commission.

However, throughout the regulations, there is no mention of conglomerate mergers and how they will be regulated by the Commission.

High Level Committee Report

The High Level Committee Report better known as the S.V.S Raghavan Committee Report does explain about conglomerate merger and its effects.

A conglomerate merger is a merger that is neither horizontal nor vertical. For example, a merger between a car manufacturer and a textile firm is a conglomerate merger. The theories for “restraining” vertical and horizontal mergers are well formulated. There however is no clear mechanism for similar restraints on conglomerate mergers except those that are based on folklore. There is sufficient evidence to suggest that conglomerate mergers do not pose any threat to competition. Conglomerate mergers are objected to on several grounds.¹⁸

The Report further discussed the potential threats of a conglomerate merger. They are listed as below:

· They create deep pockets which enables that firm to devastate the rivals.

· Lower costs below the marginal cost of the industry.

· Raise barriers to entry

· Engage in reciprocal dealing to the disadvantage of the rivals.

· Eliminate potential competition

The theory of deep pockets

It is believed that firms operating in many markets can devastate their rivals through their potentially infinite capital resources. This suggests that conglomerates can engage in predatory pricing. However, law cannot presume that possession of capital can lead to harmful pricing practices even though predatory pricing is a discredited theory. An objection based on the fact of possession of capital cannot be construed as a serious objection.

Raising barriers to entry

Conglomerate mergers help in pooling the capital resources. It is believed that conglomerate mergers can lead to the erection of entry barriers. If a firm that had for example, a limited promotional budget might now make use of the other firm’s promotional expertise. However, if competition is equated with consumer welfare then, one should really ask why is it not a valuable efficiency to bring capital to a firm that can use it ? Why is it not good for the consumers, if the single product firm shared on the cost savings in advertising and promotion that normally accrue to a multi-product firm ?

Loss of potential competition

Two arguments are proposed to support this position. First, it is believed that because of the merger, there is less “space” for new firms. Second, if instead of the merger the larger firm had tried to enter a market on its own, the threat of entry would have forced the existing firms to become more competitive and efficient.¹⁹

CONCLUSION:

Under Indian Jurisdiction, no competition issue due to conglomerate merger has occurred until now. Besides the High Level Committee Report, there is no other legal text specifying about conglomerate. However, with the fast growing development of Indian Competition regime, it is hoped that the Commission will come out with some practice to control the conglomerate effect on the market, as and when a case of such nature arises.

As far as the developed jurisdictions are concerned, there lie certain differences between the European and the American approach to conglomerate mergers. However, these differences no longer result from an intention on the part of the European Commission to primarily protect competitors. In this spirit it has been claimed quite often by U.S. scholars and even officials of the U.S. antitrust authorities that European merger control protects competitors whereas the U.S. antitrust authorities protect competition itself.It is not necessary to analyze here whether this claim was justified in the past, even though it appears that such a view was over-simplistic.

REFERENCES:

1. Kennecott Copper Corp. V. FTC, 467 F.2d 67, 74(10th Cir. 1972); U.S. v. Black & Decker Mfg. Co. , 430 F.Supp. 729, 734 n.5 (D.MD. 1976).

2. Cf.ICN (2006)

3. Cf. Dreher (1987), page 28

4. Cf. published by the US FTC in, among others, Möschel (1980), p. 206 ff.

5. Consent decrees are the analogue to clearances subject to obligations/conditions

6. The doctrine was imprecisely defined and is based on market foreclosure effects, deterrence effects and efficiency effects

7. Cf. FTC v. Procter&Gamble Co., 386 U.S. 568 (1967). The Supreme Court quashed the judgement of the appellate court and rejected the case with the requirement that the merger be prohibited/dissolved.

8. Cf. U.S. v. El Paso Natural Gas Co., 376 U.S. 651 (1964) and U.S. v. Falstaff Brewing Corp., 410 U.S. 526 (1973). Both cases involved companies which were active in the same product but different geographic markets and cannot therefore be classified as conglomerate mergers according to the definition made in this paper.

9. (XIXth Report on Competition Policy (1989), p. 228.

10. Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings, 2008 O.J. (C 265) 6, available at http:// eur lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:265:0006:0025:EN:PDF [hereinafter Non-Horizontal Guidelines]

11. Id. Para 97

12. Bauer, Government Enforcement Policy of Section 7 of the Clayton Act: Carte Blanche for Conglomerate Mergers?, 71

13. Jonathan Baker, Mavericks, Mergers, and Exclusion: Proving Coordinated Competitive Effects Under the Antitrust Laws, 77 N.Y.U.l.rev. 135, 147 (2002);

14. Non-Horizontal Guidelines, Para 47

15. Id at Para 47-48

16. Id at Para. 48.

17. Case IV/M.993, Bertelsmann/Kirch/Premiere, 34, 48, 53 and 66 (European Commission, decision of May 27, 1998)

18. Para 4.7.1, Committee Report

19. 4.7.2, Committee Report

Received on 10.11.2014

Revised on 14.11.2014

Accepted on 26.11.2014

Research J. Humanities and Social Sciences. 5(4): October-December, 2014, 361-365