Nestlé-Perrier Merger
Discuss the product market definition by the European Commission (henceforth EC). Do you agree with this definition? Which test did EC follow to define the relevant product market? Relate your answer to the concepts of supply and demand substitutability. Is there another market definition that you would have considered possible or reasonable in this case? If yes, how would the EC’s final decision have been affected by this alternative market definition?
The goal of the qualitative studies conducted by the EC was to define the relevant product market, more specifically, whether soft drinks and purified tap water could be considered substitute goods for “bottled source water” . The EC used the Small but Significant Non-transitory Increase in Prices (SSNIP) test to determine whether an incremental, non-temporary increase in the price of bottled source water would entail a decrease in demand, and a subsequent increase in demand for soft drinks (including purified tap water). Such cross-price elasticity of demand would indicate that the goods were highly substitutable. According to the EC’s findings, there are a number of reasons why this would not be the case, these are described in more detail below.
From a production standpoint, soft drinks were significantly more expensive than bottled source water. Letting still mineral waters act as reference, as they accounted for more than 70% of consumption in France, soft drinks were on average 2-3 times more expensive at both manufacturer and retail levels.
The correlation coefficients of bottled source water prices were very high (0,85-1,00), while being low/negative between bottled source water and soft drinks. Expressed simply, this means that as still mineral water water prices go up, soft drink prices will not necessarily follow, and might even fall.
When it came to product characteristics, the EC argued that there are strict regulations regarding the production of bottled source water, while soft drinks are not regulated in similar fashion since they rely on tap water. Furthermore, the EC’s studies showed that bottled source water is bought in large part due to its (through expansive advertisements promoting this effect) general association with a healthy lifestyle, something that does not hold true for soft drinks.
Our analysis of the EC’s definition brings us to believe that it is fundamentally sound. The tests carried out by the commission were to compare the substitutability of “bottled source water” for soft drinks (including tap water). Specifically under the assumption of an incremental increase in the price of the former category. There are evident differences between soft drinks (and tap water), and what is generally thought of as “mineral water” (defined in the case as “bottled source water”). Much as the EC proposes, bottled source water sells because