Coke and Dr Pepper

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~ pplication f the Merger
o
Guidelines: The Proposed Mcjrger
of Coca-Cola and Dr Peppeu

Industry Background

Lawrence J. White

On February 20, '1'986,the c'&-CbIa company announced its intentions to purchase the Dr Pap& company and merge the o~erationsf o
had anthe two companies. T h m and a half wicks earlie&$$$&
nbunrod its inreations-top .
&*
bven-Up~Comdsmy, hich was
w
a subsidiary of the Philip Moms Corporation. These two mergers would have meant the consolidation, respectively, of the f ist and fourth and the second and third largest sellers of concentrate for carbonated soft drinks in the United States. Exercising its antitrust enforciment responsibilities, the Federal Trade Commission in June 1986decided that these mergers were likely to be anticompetitive and declared its preliminary decision to oppose them. In the face of this opposition PepsiCo and Seven-UDcalled off a

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their merger. but ~oca-Cola nd Dr pepper persisted to 1 1 paint of a small-scale trial in Federal District Court..
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This case is important in at least two rcspms. First, it r &.qenteda federal government antitrust challenge to a major merger at a time when critics of the Reagan administration's antitrust entorcement agencies were claiming that these agencies had largely abandoned enforcement. Second, it is a case in which sophisticated economic reasoning shaped and influenced the structure of many of the arguments advanced by both sides, as well as much of the trial opinion written by the iudae in this case.

?hi; case study will provide the background, anal92 the economic arguments advanced by both the plaintiff (the m C)and tne defendant ~~

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J. White was an e x p c ~ itness Tor the Federal Trsdc CommissionI n the mcrgw e n described i n the leal. Thc vicws and odnions cxvrcsscd i n thischaatcr. howavcr. do --.not n eauarily mprcsml lhoseorthe Fed&~ fradedommission n orofkc lTCs(afflawy en and econornisls who workad on t hecam. Thanks arc due lo Marilyn F nnkd, John Kwolra. William Lynk Gordon Spivak. and Grcsow Werden for their he aful mmrnents -on an earlier dm?.

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Lawrence J. Whlte

Coca-Cola. D t Pepptt&psiCo, and Seven-Up aic tisilatly i&n(lYic as producemof carbonated son drinks (CSB).Whether CSD was t1 a a~rooriatemarket for iudaina the c om~etitive onsequences
c
these .*nstrue*,, ~ . q ~ be & c ~ +er& ; i the.d arket s h e @ ~a. ~ ~ & ~ ~ - ~ w e ~ ~ -p~e;'
been- m e r g c n
. mi i B ~ h
kipuids-was an important issue in the F TCs investigation and tl eventual trial. But, because of tbe companies' primary identificatic as CSD oroducen land because the FTC and the trial judge did co --elude t h i t w~ t~ relevant m r e ) someback&~& inform

as he ~
akt,
tion on the CSD industry should prove useful for the discussion th follows.
The natio&CSD producemare, for themisstpast, maaufhch
ers of flavoring conoentrate.l They sell the cohcentdib fa'lnde* dent local bottlers, who add carbonated water and sweetener a c
~ ackaaebe finished CSD into bottlesaod cans.@tttemprovidet
t
,i ubseiuent distribution function, delivering the packaged CSD food stores, vending outlets, and other retail outlets. Many bottli also deliver syrup (concentrate plus sweetener) to restaurants a n other 'fountain* accounts. Bottlers frequently handle the brands, more than one concentrate manufacturer, buCmot

plaa.'flavor mtn'ctionsa on the ability of bottlers
brandsto W d l e competingcompanfes*.bmQaVitb'
Thus, in some areas the local Coca-Cola bottler may handle Sevi Up, but hexwould never also distribute Pepsi or.Roya1 Crown. concentfater nanufact~ucn-~enctally~rict
their%onlers to d
i
bution in l dgeolpaphic areas. Finally, in the 1980sa few conci trate m anufacturers~specially oke and Pepsi-began absorbi
C
some of their bottlers into the parent companies, so that the lat were becoming more vertically integrated.
The CSD industry involve^ large dollar sales volume^....
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