The Economic Effect of the European Commission´S Actions Against the Coca Cola Company

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* The Economic Effect of the European Commission´s actions against The Coca Cola Company

Maastricht University| | | |
School of Business & Economics| | | |
Place & date:| Maastricht, 7.12.2012| | | |
Name, initials:| Krapp, Fabian| | For assessor only| | ID number:| I6049414| | 1. Content| |
Study:| Economics| | 2. Language structure| |
Course code:| EBC1010| | 3. Language accuracy| |
Group number:| 01| | 4. Language: Format & citing/referencing| | Writing tutor name:| Gaye van Denderen| | Overall:| |
Writing assignment:| Main Paper (Task 10)| | Advisory grade| | | | | Assessor’s initials| |
Your UM email address: f.krapp@student.maastrichtuniversity.nl

* The Economic Effect of the European Commission´s actions against The Coca Cola Company

* Table of Contents
* 1. Introductionp.2
* 1.1 Background to the Casep.2
* 2. Loss of Welfare due to Market Powerp.3
* 2.1 Economic Effect of the Commitments on Market Competitionp.5 * 3. Conclusionp.6

* 1 Introduction

The Coca Cola Company (TCCC) is an American corporation and manufacturer especially known for its soft drinks like Coca Cola or Fanta. It sells over 3500 products, is available in over 200 countries and has revenues of nearly 50 billion us-dollars (Coca Cola Company, 2011). After Coca Cola was accused by the European commission (EC) to have abused its market power, Coca Cola gave in and set up commitments to prove that it does not abuse its power. They promised no exclusivity arrangements, no target or growth rebates, no use of its stronger brands to sell other less strong brands and finally a 20 percent free space in their coolers for other products and brands. These commitments were accepted by the EC. This essay explains why the EC is concerned about the abuse of market power and analyzes the commitments stated by the coca cola company in its economic terms and how they affect the market competition. Finally it will evaluate if the EC was correct in accepting these commitments.

Background to the Case

The EC tries to establish a free competitive market and a fair competition between businesses in setting up competition policies like state aid, merger control rules and antitrust also known as the European competition law (Report European Comission, 2010). It does so to ensure the maximization of social welfare which will be further explained in section 2. In September 2004, the EC started to proceed against the Coca Cola Company relying on their antitrust regulation. In October, 2004 Coca Cola was sent a “preliminary assessment” which stated the EC´s concerns about their abuse of market power. One month later Coca Cola submitted commitments in response to these Claims (European Comission, 2006). The four commitments are as followed: 1. Coca cola promised that at all time their customers are free to buy or sell carbonated soft drinks from any supplier of their choice and therefore no more exclusivity arrangements; 2. No target or growth rates are allowed. Coca Cola no longer offers rebates that reward in purely purchasing the same amount or more of Coca Cola products than in the past. Hence it is easier for customers to purchase from other suppliers; 3. Coca Cola is not allowed to use its strong brand to push other products which are not that popular goods; 4. If Coca Cola provides free coolers to retailers, the retailers are allowed to use 20 per cent of its space for other brands and goods. If Coca Cola should break these commitments the EC could demand a fine of ten per cent of Coca Cola´s total worldwide turnover (European Comission, 2006).

Loss of Welfare due to Market Power

But why is the EC actually concerned about the abuse of market power, the ability of a firm to charge a price above marginal cost and earn a positive profit (Perloff, 2012), of big firms like TCCC? The main answer to this question is that the EC...
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