European Commission´s actions against The Coca Cola Company Essay

* 1 IntroductionThe coca plant dummy Comp some(prenominal) (TCCC) is an Ameri disregard corporation and manufacturer curiously known for its soft drinks like coca booby or Fanta. It sells over 3500 products, is avail open in over 200 countries and has revenues of nearly 50 billion us-dollars (Coca sess Company, 2011). After Coca pot was acc white plagued by the European commission (EC) to have treadd its market forcefulness, Coca Cola gave in and set up consignments to prove that it does non abuse its power. They promised no exclusivity arrangements, no target or growth rebates, nouse of its stronger brands to sell other less strong brands and finally a 20 per centime free billet 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 hurt and how they affect the market rivalry. Finall y it will evaluate if the EC was correct in accepting these commitments. terra firma to the CaseThe EC tries to establish a free rivalrous market and a fair competition mingled with businesses in setting up competition policies like state aid, merger control rules and antitrust also known as the European competition law ( herald European Comission, 2010). It does so to ensure the maximisation of affectionate welf are 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 send a preliminary assessment which stated the ECs concerns about their abuse of market power. matchless month later Coca Cola submitted commitments in response to these Claims (European Comission, 2006).The 4 commitments are as followed 1. Coca cola promised that at all time their customers are free to buy or sell change soft drinks from any supplier of their choice and so no more exclusivity arrangements 2. No target or growth rates are allowed. Coca Cola no longer offers rebates that reward in rigorously purchasing the identical amount or more of Coca Cola products than in the past. Hence it is easier for customers to leveraging from other suppliers 3. Coca Cola is not allowed to use its strong brand to push other products which are not that popular steady-goings 4. If Coca Cola provides free coolers to retailers, the retailers are allowed to use 20 per cent of its topographic point for other brands and goods. If Coca Cola should break these commitments the EC could take on a fine of ten per cent of Coca Colas total worldwide turnover (European Comission, 2006).Loss of Welfare due to marketplace PowerBut why is the EC actually concerned about the abuse of market power, the index of a firm to charge a price above marginal cost and earn a positive pull in (Perloff, 2012), of massive firms like TCCC? The main answer to this question is that t he EC tries to ensure social welfare and to maximize it. But before answering this question social welfare needs to be elucidated. Social welfare itself is difficult to measure. One way to measure it is to define it as the sum of the consumer and producer surplus. Perloff describes the consumer surplus as The monetary difference between what a consumer is willing to pay for the quantity of the good purchased and what the good actually costs (Perloff, 2012). In other words the consumer surplus is used to measure and equation consumer welfare, the emolument of a certain product a person gets consuming that product less the capital he or she paid for the good. In contrast the producer surplus is described by Perloff as followed The difference between the amount for which a good sells and the minimum amount necessary for the seller to be willing to produce the good (Perloff, 2012).It is the gain of trade and thus equal to the profit from trade negative the profit from not trading. The EC tries to maximize the social welfare. This is totally possible in a rivalrous market because in such a market environment the price equals the marginal costs (Perloff, 2012) which results in an equilibrium price, an economic term for a balance between the wants of producers and consumers and no loss of welfare. However, the converse production line is that in a non- hawkish market social welfare is not maximized. The largergest counterpart to a free competitive market is a monopolistic market. Although TCCC is not a real monopoly it has big market power and layabout therefore be compared to a monopoly. The loss of social welfare, the deadweight loss, which occurs if a monopoly (or a company with a big market power) arises, is shown in Figure 1.Figure 1 Deadweight Loss of Monopoly 1 (Barnett, 2007)Figure 1 shows that at the competitive equilibrium the price (Pc) is lower than the monopoly price (Pm) and the quantity (Qc) is bigger than the quantity (Qm) which the monopoly supplies. Hence a deadweight loss arises. This deadweight loss develops unaccompanied due to missing competition. This scenario could appear due to an abuse of market power. By definition, market power isthe ability to charge a price above marginal cost and therefore earn a positive profit (Perloff, 2012). Compared to a competitive market the demand booze-up is not horizontal but downwards sloping. This marrow that although the quantity decreases if a monopoly chides its price there are lighten buyers for the product. In a competitive market this is not true because the demand hoist is horizontal and only the slightest increase in price will result in zero demand. As we digest come over in Figure 1 The monopoly is able to set its price not at the equilibrium (the ford of marginal cost and the market price) but at a point at which it maximizes its own profit (a point where the price is higher than marginal costs).This results in a welfare loss for the consumers which the EC tries to prevent. moreover the market power is related to the shape of the demand curve and tells a monopoly how much it merchantman raise its price above the competitive equilibrium (the interception with the marginal cost) at the profit maximizing quantity. The more expandible the demand curve becomes, graphically this would means a nearly flat curve, the more sales are lost even if the price is only slightly increased. Conversely, if the demand curve is a steep curve (not very e decisionic) it would bear fewer sales by the same increase of price (Perloff, 2012). However a firm with a big market power or a monopoly benefit from large economies of scale. They can produce their products cheaper than any number of other firms together and for this reason not challengeable (Perloff, 2012).Economic violence of the Commitments on Market CompetitionConcerned of the big market power TCCC had, the EC decided to deputise and requested Coca Cola to come up with solutions to allow the f ree competition to grow. Coca Cola then set up four commitments which were accepted by the EC. Although all four head to the same economic substance of lowering launching barriers for competitors and accordingly make consumers more aware of substitutes for Coca Cola products, all four are described separately. The first commitment assured that TCCC would not accept any exclusivity arrangements. It allows customers of Coca Cola to sell any soft drinks from any supplier next to Coca Cola. This means more suppliers which results in more products similar to Coca Colas products, substitutes. Although thesesubstitutes existed also before the commitment it is now much easier for consumers to be aware of these and accordingly buy these. The economic effect of more substitutes was already explained in section 2 The market power is related to the demand curve. The flatter the demand curve is the more elasticised it is and therefore a small increase in price leads to a big loss in sales. If we now take the substitutes into account the demand curve of TCCC becomes more elastic because consumers can choose between products of different suppliers.Hence Coca Cola cannot set its price per unit as high as before. In other words the demand curve gets closer to a competitive demand curve and if TCCC sets its prices too high consumers will buy a substitute. In addition as prices of Coca Colas products gets lower it becomes easier for other firms to enter the market. The second commitment prevented Coca Cola to set up target or growth rates. Hence Coca Cola was not able to reward customers for purchasing the same amount or more of Coca Cola products than in the past. once more this makes it easier for customers to buy from other soft drink suppliers or a less amount of Coca Cola products plus different products. Economically this has the same effect as the first commitment and concentrates the overall effect The demand curve becomes even more elastic and the market becomes more competitive. The third commitment states that TCCC is not allowed to use the strongest brands to sell less popular brands.Again consumer can choose more easily between different suppliers and the competition in the market is further increased. Next to this economic effect it is now harder for Coca Cola to sell its less popular products and weakens its market power and brings TCCC even closer to sell at the competitive equilibrium. Secondary to the economic effect of the more elastic demand curve the decrease of entry barriers and the gain of substitutes increase the supplement of the market. As more suppliers enter the market, supply increases which lowers the price of products in the market. The last commitment allows retailers to use 20 percent of the space in the Coca Cola coolers although they were provided by TCCC for free. so Retailers who want to benefit of a free cooler are not forced to use it only for Coca Cola products anymore. This makes it easy for consumers to be awa re of substitutes of Coca Colas products as rise as comparing prices. All in all the four commitments are heading to decrease TCCCs market power and to increase the competition in the market. They do so allowing substitutes gainmore solicitude by customers which results in a more elastic demand curve for Coca Cola. The more elastic it becomes the more competition increases in the market. Moreover the markets supply increases and prices decrease.ConclusionFinally it can be said that firms with too much market power can reduce the social welfare. In order to protect this social welfare the EC accepted the four commitments. The closer analysis of the four commitments and their economic effect on the market shows that due to lower entry barriers the markets supply is increased and more substitutes are easier available for consumers. In addition, Coca Colas demand decreases and it cannot benefit from its economies of scales as it could before.Furthermore, it cannot set its price as hig h as it could before. Although Coca Cola does not lose all of its market power and is still one of the biggest companies and soft drink suppliers worldwide its market power is reduced by the ECs actions and this results in an increase of market competition and a drop-off of Coca Colas market power. If it was actually maximized to its fullest cannot be said because the information of actual demand or marginal cost curves is always limited, nor are the theoretical assumptions of a market environment stipulation in real life. Nevertheless, the social welfare was definitely increased by the EC and therefore it was effective to accept the four commitments.ReferencesBarnett, T. (31. October 2007). Maximizing Welfare through technological Innovation. From www.justice.gov http//www.justice.gov/atr/public/speeches/227291.htm Coca Cola Company, C. C. (31. celestial latitude 2011). Anuual Report of Exchange. Von www.sec.gov http//www.sec.gov/Archives/edgar/data/21344/000002134412000007/a201 1123110-k.htm Comission, E. (2006). Competition in Practice Coca Cola.European Comission, E. (2006). Coca Cola.Perloff. (2012). Microeconomics. England Pearson.Report European Comission, C. (2010). Report on competition policy . Brussels.