FTC v.

Coke
I. Overview

Dakota Burrow

In February 1986, the Coca-Cola Company alerted the FTC of its intentions to merge with the Dr. Pepper Company. After conducting a quick investigation, the FTC decided in June 1986 to oppose the merger. The FTC alleged that the merger would be anti-competitive and thus violate section 7 of the Clayton Act. Coca-Cola is a producer of carbonated soft drinks (CSD.) At this time, Coca-Cola mainly produced flavoring concentrate which was then sold to independent bottlers. These bottlers add carbonated water and sweetener and complete the CSD. These bottlers are then responsible for distribution to; food stores, vending outlets, and in some cases, deliver a syrup to restaurants. These bottlers are often subject to flavor restrictions whereby competing CSD brands of a similar flavor can not use the same bottler. It is important to understand the role and relationship of the independent bottlers to the concentrate producers in order to understand the arguments presented by the FTC and The Coca-Cola Company. Dr. Pepper is a Waco, Texas sourced CSD company. During the 1980's they had become insolvent. As a result, they first became a private company, and later were attempted to be purchased by other CSD companies. Their CSD was marketed as a pepper flavored drink as opposed to the cola drinks of Coca-Cola and Pepsi-Cola, and the ginger ale of 7-Up, and Sprite. Coca-Cola twice attempted to compete with Dr. Pepper in the pepper flavored CSD market. First, with Dr. Pibb (later Mr. Pibb) and then with Cherry Coke. Both attempts were unsuccessful which was part of the reason for CocaCola's attempted merger. II. Legal Issues To comply with the Hart-Scott-Rodino act of 1976, Coca-Cola had to alert the FTC and the DOJ of its intention to merge. They did this, and in June 1986 were informed that the FTC intended to seek a

preliminary injunction (PI.) A PI is an order from a Federal District Court that immediately halts the merger and leads to a minitrial. A PI is granted when it is found that a challenged acquisition is reasonably likely to lessen competition substantially A Federal District Court granted the FTC a PI and the two parties went to a minitrial. The civil law minitrial took place in mid-July and was conducted by Judge Gerhard Gesell. The FTC claimed that the merger would be anti-competitive which was in direct violation of section 7 of the Clayton act. III. Economic Analysis Several economic arguments were made during the case. These included, relevant market, market concentration, and market contestability. Relevant Market A relevant market is the geographic and product dimensions of the company. The FTC claimed that the relevant market of Coca-Cola was the CSD industry. They supported this claim by interviewing competing CSD executives who claimed that their main competitors were other CSD companies. The same executives also believed that a collective price increase of 10 percent by CSD companies would not deter sales towards other beverage industries. Coca-Cola argued that the relevant market had shifted in recent years, and that CSD products were now an acceptable supplementary good to other beverages. They further claimed that the geographic dimensions were the entire United States and not the United States in local regions. Market Concentration Market concentration proved to be a crucial deciding point for the case.