The Impact Of Coca Colas Commitments Commerce Essay

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The European Commission received several complaints about abuse of Coca-Colas dominant position and decided to investigate these. In 2004, the Commission decided to start proceedings against Coca-Cola, based on Antitrust Regulation 1/2003.

In October of the same year they sent the company a 'preliminary assessment', which said that they and their respective bottlers have possibly abused their dominant position. This would have been done by pursuing a number of actions in the distribution channels. In this preliminary assessment the Commission gave Coca-Cola the opportunity to take these concerns away by the submission of some commitments. The company took this opportunity and, in November of 2004, proposed the commitments which they submitted. This set of commitments was also published in the Official Journal of the European Union, whereby interested third parties (e.g. consumers, customers and competitors) were invited to submit their critical observations (European Commission, 2006).

In June 2005 the European Commission adopted a decision that rendered Coca-Cola's commitments legally binding (European Commission, 2006). Coca-Cola offered the following commitments: no more exclusivity arrangements; no target or growth rebates; no use of Coca-Cola's strongest brands to sell less popular products and 20% of free space in Coca-Cola coolers. This paper therefore describes whether the EC was correct in adopting this decision.

First, this paper will explain the case more deeply. This is followed by determining the economic impact these commitments have on the competition. Finally it will weigh up the arguments the Commission has and form a judgement on it. ------------------------------

2. The Coca-Cola case

As already said in the introduction, The Coca-Cola Company (TCCC) and some of its bottlers were accused of abusing their dominant position. This abuse is against the European Commissions antitrust policy. Therefore, the EC started inspecting some of Coca-Cola's premises in Europe.--------------------------------------------------------------------

In 2004, after a number of studies, the Commission has found enough evidence against Coca-Cola. They learned that Coca-Cola was forcing their retailers to agree to an exclusivity deal which ensured that it was impossible for brands like Pepsi to get their place in a shop. They also found that stocks of some of their retailers were completely filled with Coca-Cola products just to qualify for a rebate from Coke. As last turned out that in their refrigerators was no space allowed for others than Coca-Cola's stronger brands and their other products.---------------------------------------------------------------------

For the EC, this was a sign to start proceedings against Coca-Cola following the antitrust Regulation1/2003 (European Commission, 2006). In October 2004, Coca-Cola received a 'preliminary assessment' from the Commission. This assessment contained that they have the concerns that the company and some of their bottlers may have abused their dominant position. In its assessment, they also gave Coke the opportunity to erase these concerns by submitting a number of commitments.

2.1 The Market

According to the European Commission consists the CSD market of Cola-flavoured, orange-flavoured, lemon and/or lime flavoured, other fruit-flavoured CSDs and bitter CSDs. Beverages, such as water, sports and energy drinks are not considered in this market. This description is supported by the fact if there are concerns, and they are about product characteristics or intended use, CSDs can be separated by other beverages. (European Commission, 2005).

Coke knows two distribution channels, one for consumption at home (take-home channel) and one for consumption on premise (on-premise channel). In its preliminary assessment the EC also comes to the conclusion that the two distribution channels comprise two different markets (European Commission, 2005). There are a few differences between those two. First, the sales in the on-premise channel are depending on the supply of extra services, which is not the case with the take-home channel. Other differences are large price differences, differences in the use of package mixes and technical sales facilities and the diversity in the roles of intermediaries.

The ECs assessment defined the geographic market as national, due to different consumption patterns in various countries and distinct domestic market shares. Moreover, this vision is supported by prove about contrasting consumer preferences, price variants and from country-to-country different packaging and recycling systems (European Commission, 2005).

2.2 The commitments

The TCCC started brainstorming about this and, in November, they submitted a set of commitments. As a reaction to this, the EC published these commitments in the Official Journal of the European Union. By doing this, the Commission invited consumers, customers and competitors to look at this with their critical eye. The 33 market players who provided the Commission with their observations, confirmed that these commitments could take away the concerns the EC had.

In June 2005, the Commission decides to make the commitments of Coca-Cola legally binding. The commitments Coke has proposed are the following:

No more exclusivity arrangements. This is an arrangement between two or more companies to only negotiate with one another. Coke's customers have to be free to sell and buy products from the supplier of their choice. If a tender is organized by a large, private client and Coca-Cola has the best offer, they are allowed to be the only supplier.

No target or growth rebates. If a customer buys an equal or a greater amount of product than in the past, Coca-Cola will not offer rebates anymore. This should make it less difficult for their customers to buy products from other CSD suppliers if they want.

No use of Coca-Cola's strongest brands to sell less popular products. Coca-Cola will not force their customers anymore to buy less popular products when they are willing to purchase some of their best-selling brands (e.g. regular Coke or Fanta Orange). Additionally, Coke will not offer a rebate when a customer buys the products together or to reserve shelf-space for all their products.

20% of free space in Coca-Cola's coolers. If Coca-Cola offers their retailers a free cooler and there is no other chilled beverage capacity in the shop, the retailer is allowed to use at least 20% space in the cooler for products of competing CSDs. (European Commission, 2006)

These commitments will remain in force until 31 December 2010. If Coca-Cola breaks them, the Commission could impose a fine of 10% of Coca-Cola's total worldwide turnover. (European Commission, 2006)

3. Economic effect of the commitments

But what economic impact do these commitments have on the competition? In this section, for each commitment will be explained what would have happened if the EC did not stop Coca-Cola.

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3.1 No more exclusivity arrangements

The first commitment Coke did was that they will not make exclusivity arrangements anymore. This kind of contracts, especially when you have such a big market share as Coke has, keep small(er) competitors out of the market. Sometimes, they even directly prevent customers from offering competing brands. By making these arrangements, Coke's market share increases and their dominant position will become more dominant which means Coke get more influence in pricing.

3.2 No target or growth rebates

The second commitment comprised no target or growth rebates. Target and growth rebates were rewarded by Coca-Cola. A target rebate is individually set on the basis of a customer's past performance and a growth rebate by implying sales growth (European Commission, 2005). The smaller competitors of Coca-Cola were not able to reward growth rebates like Coke, therefore they will not be a real competitor this way. As a consequence, by rewarding growth rebates, Coca-Cola kept smaller brands like Pepsi out of the market. Another consequence is that Coke's market share enlarges which in this case also means that they can influence the market price more. Their output becomes bigger because their products will be more demanded due to their rebates.

3.3 No use of Coca-Cola's strongest brands to sell less popular products

Another commitment is no use of Coca-Cola's strongest brands to sell their less popular products. Before the commitment, Coca-Cola combined the selling of their populair products with the sale of less popular products by requiring to buy a less popular product when they only want to buy one of their best-selling brands. Coke also rebated its customers when they bought less popular products together with their biggest brands. By doing this, it became almost impossible for smaller companies to compete with them, because they were unable to provide the same rebate, due to their limited size. But coke did not only rebated their customers for this. They also paid out assortment related rewards. A customer who bought from ten up to sixty stock keeping units received substantial payments from Coke. Their competition had the concern that the revenue earned from the best-selling SKUs was used to advance orders of their less-selling products (European Commission, 2005). For Coke's competitors this made it hard and more expensive to get sales space in shops. Coca-Cola's market share magnified on account of more and more customers for their products. A bigger market share, again, means that they can affect the market price to a greater extent. This will also make their output grow.

Moreover, Coca-Cola used space-to-sales arrangements. In these arrangements they offer their customers a proportion of Coke's total sale in the take-home channel when they reserve a part of their shelf space for Coca-Cola's products (European Commission, 2005). As a result of a large profit from Coke's bigger brands a large part of shelf-space was reserved for them. Coke organized this shelf-space in a way that benefited their less-selling products. This also made it hard for Coke's rivals to get entrance in outlets, particularly for those competing with Coke's less-selling CSDs. Coke would have gained a bigger market share in this market, they could have affected the market price more and their output would have grown.

3.4 20% of free space in Coca-Cola coolers

The last commitment includes that a retailer can use at least 20% of free space for a product of their choice when there is no other cooled beverage capacity. In small shops these coolers are often used. If the space in such a beverage cooler is only reserved for Coca-Cola's products, access to these stores will be prevented for competing companies.

Preventing competitors lead to a bigger market share, a bigger participation in price setting and a growth in output.

3.5 Total effect

All the commitments Coca-Cola did are a result of making it difficult, or even prevent their rivals from entering the market. By doing this, the competiton in the CSD market decreases, which leads to less innovation and a less increase in efficiency. This leads, finally to Coca-Cola becoming more and more like a monopoly. When this happens the price will be set at the point where MC and MR are equal (Perloff, 2009), which means an increasing price.

4. Weighing up the arguments---------------------------------------------------------------------

The argument the EC had for adopting the decision that rendered the commitments legally binding were that these benefit consumers by raising competition. They raise competition by increasing consumer choice and forestall Coke from making exclusivity arrangements, offering target or growth rebates or obligate their customers to buy some of their less-selling products with one of its stronger brands.

Figure 1. Deadweight Loss of Monopoly From: "Microeconomics (5th ed.)"by Perloff J.M. 2009, p. 364

As can be seen in the figure the price in a competitive market will be lower, because in a competitive market the price will be where the demand curve intersects the marginal costs (supply) curve. Although the price in a monopoly will be at the point where MR and MC are equal. This lower price leads to a bigger consumer surplus and a smaller deadweight loss which is better for the society. Therefore, in a more competitive market, consumers will be more satisfied. As a consequence, the commitments the EC adopted are judged as correct because they do increase competition which is better for every market player and all these commitments prevent the abuse practices statet in Article 82 of the EC Treaty.

5. Conclusion

In conclusion, the commitments defined in this paper will increase competition and therefore, benefit consumers. Before the commitments were made legally binding, Coca-Cola could create a considerable market power which would have been resulted in a monopolistic position. Consequently, this reduction of competition would lead to a deminishing consumer welfare. By making the commitments legally binding the European Commission reduces the risk of abuse of Coca-Cola's dominant position again, and increases the competition in the CSD market. This paper concludes that the European Commission was correct in adopting the decision that made the commitments Coke proposed legally binding because they stimulate a fair competition between the various competitors.

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