The Coca Cola Company, a Threat for Competition?

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The Coca Cola Company, a threat for competition?

Universiteit Maastricht
Faculty of Economics and Business Administration
Maastricht, 12 December 2006
Coenen, PJGA

Table of contents
Introduction……………………………………………………………………………2 1. Market specification………………………………………………………………..3 1.1 Distinction within the market
1.2 Market dominance of The Coca Cola Company

2. Key economic issues…………………………………………………………………4 3. Economic analysis…………………………………………………………………....5 Conclusion………………………………………………………………………………6 References……………………………………………………………………………….7 Introduction

Economists are always eager to eliminate every conduct which will lead to a non-competitive market. The models for economic analysis of markets presented in most secondary school books always start with the perfect competitive market. So, clearly every practice of business conduct which is not in harmony with the perfect competitive model has to be condemned. Unfortunately, in real life there are more factors which economists normally would not take into account. As Wehmhorner (2006) has said “Conditions of perfect competition are rarely fulfilled in the real world”. This calls for an extensive competition policy, inevitably with government intervention. The European Commission (EC) has developed a very powerful competition policy, which is divided into 2 different elements. First, the EC prohibits every agreement between companies which limit competition and second, the EC prohibits every abuse of a dominant position by a firm within a market (European Commission, n.d.). This paper will discuss a case of a firm that was assumed to abuse its dominant position, The Coca Cola Company (TCCC). There are probably numerous reasons behind the success of TCCC, such as its very strong brand name ‘Coca Cola’ and its marketing techniques. Of course, these are all legitimate reasons to explain the dominant position of TCCC on the market. It is the power which is linked to this dominant position which can make the situation unfair. PepsiCo (Pepsi) accused TCCC of abusing this particular power to drive them out of the market (Economist, 1999). This led to an interference of the European Commission (EC). TCCC and its bottlers agreed to make commitments for several practices and on June 22, 2005 the EC made these commitments binding (European Commission, 2005b). The question arises whether The Coca Cola Company used its dominant position in such a way that the competition on the market was intolerably limited.

First the market discussed in the case will be specified. It will become clear that the market was limited by the EC for several reasons. Secondly this paper will identify the key economic issues and elaborate on the impact these issues have on competition, more specific, why the EC thought they were harming competition. At last this paper will weigh up the economic arguments used by the EC and form a judgement.

1. Market specification
1.1 Distinction within the market
In its investigation the EC specified the relevant market on which it will base its research. As said in the introduction the most important submarket of the non-alcoholic beverage market is the carbonated soft drinks (CSDs) market. Consequently all the energy drinks, flavoured or non-flavoured water, juices etc. are excluded from the case. According to the EC (2005) the market was limited for two reasons. First, the CSDs have one very common characteristic namely that they are carbonated and usually have a sweet taste which is suggested by the EC to mainly attract younger customers. Second, the fact that there were differences in prices, volumes traded, and the preferences of consumers with regard to substitution on this particular market made it plausible for the EC to make a distinction between the market for CSDs and the remainders (European Commission, 2005a). This is reasonable because TCCC holds his dominant position mainly on the CSD market (The...
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