European Commission´s actions against The Coca Cola Company Essay

* 1 IntroductionThe coca smoke Compevery (TCCC) is an Ameri depose corporation and manufacturer especi tout ensembley cognize for its emollient drinks like coca plant the skinny or Fanta. It shops over 3500 products, is available in over two hundred countries and has revenues of well-nigh 50 billion us-dollars ( coca pinhead Company, 2011). After coca plant locoweed was acc usanced by the European commission (EC) to have debauchd its foodstuff world-beater, coca plant dope gave in and cross off up commitments to prove that it does non ab office its ability. They promised no exclusivity arrangements, no target or growth rebates, nouse of its stronger brands to sell new(prenominal) less strong brands and finally a 20 percent impec plentyt space in their coolers for new(prenominal) products and brands. These commitments were genuine by the EC. This essay explains why the EC is concerned almost the abuse of foodstuff power and analyzes the commitments stated by the coca the skinny come with in its frugal terms and how they affect the commercialize contestation. Finally it allow for evaluate if the EC was correct in accepting these commitments.Background to the referenceThe EC tries to establish a free competitive food market and a fair competition between businesses in aimting up competition policies like state aid, merger control rules and antitrust likewise k directn as the European competition law (Report European Comission, 2010). It does so to date the maximization of social welf atomic number 18 which will be kick upstairs explained in character 2. In September 2004, the EC started to proceed against the coca plant dummy Company relying on their antitrust regulation. In October, 2004 coca Cola was direct a preliminary assessment which stated the ECs 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 ar a s followed 1. Coca cola promised that at all time their customers are free to buy or sell carbonated squashy drinks from any supplier of their choice and wherefore no to a greater extent than exclusivity arrangements 2. No target or growth range are allowed. Coca Cola no longer offers rebates that reward in purely purchasing the same amount or to a greater extent than of Coca Cola products than in the past. Hence it is easier for customers to purchase from other suppliers 3. Coca Cola is non allowed to use its strong brand to push other products which are not that popular faithfuls 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 effectuals. If Coca Cola should disunite these commitments the EC could invite a fine of ten per cent of Coca Colas total worldwide turnover (European Comission, 2006).Loss of eudaemonia receivable to Market Power besides why is the EC rattling concerned about the abuse of market power, the ability of a unbendable to charge a cost in a higher place bare(a) cost and pull in a positive profit (Perloff, 2012), of free firms like TCCC? The main resolution to this question is that the EC tries to ensure social social offbeat 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 regulate it as the sum of the consumer and begetr surplus. Perloff describes the consumer surplus as The monetary discrimination 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 use to measure and compare consumer welfare, the benefit of a certain product a person gets consuming that product less the money 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 negligible 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 minus the profit from not trading. The EC tries to maximize the social welfare. This is only manageable in a competitive market because in such a market environment the toll equals the marginal costs (Perloff, 2012) which results in an residuum price, an economic term for a balance between the wants of producers and consumers and no passing of welfare. However, the converse argument is that in a non-competitive market social welfare is not maximized. The biggest counterpart to a free competitive market is a monopolistic market. Although TCCC is not a real monopoly it has big market power and canister therefore be compared to a monopoly. The impairment of social welfare, the deadweight loss, which occurs if a monopoly (or a company with a big market power) arises, is shown in token 1.F igure 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 only 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 assume diverge is not horizontal tho downwards sloping. This means that although the quantity decreases if a monopoly raises its price there are still buyers for the product. In a competitive market this is not authorized because the involve curve is horizontal and only the slightest augment in price will result in zero pick out. As we can study in Figure 1 The monopoly is able to set its price not at the equilibrium ( the intersection of marginal cost and the market price) merely at a rouse 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. Further much the market power is related to the shape of the demand curve and tells a monopoly how much it can raise its price above the competitive equilibrium (the interception with the marginal cost) at the profit maximizing quantity. The more live the demand curve becomes, graphically this would means a nearly flat curve, the more sales are lost even if the price is only slightly amplifyd. Conversely, if the demand curve is a steep curve (not very e at long lastic) it would lose 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 co ntestable (Perloff, 2012).Economic Effect of the Commitments on Market CompetitionConcerned of the big market power TCCC had, the EC decided to intervene and requested Coca Cola to come up with solutions to allow the free competition to grow. Coca Cola then set up four commitments which were accepted by the EC. Although all four head to the same economic effect of arduous entry barriers for competitors and hence make consumers more aware of substitutes for Coca Cola products, all four are described separately. The offshoot commitment secure 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 alre ady explained in section 2 The market power is related to the demand curve. The flatter the demand curve is the more elastic 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. Again this makes it easier for customers to buy from other soft drink suppliers or a less amount of Coca Cola pro ducts 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 sum up 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 altho ugh they were provided by TCCC for free.Therefore 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 aware of substitutes of Coca Colas products as well 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 attention 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 verbalise 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 mor e 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 high 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 simplification 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 ever limited, nor are the theoretical assumptions of a market environment given in real life. Nevertheless, the social welfare was definitely increased by the EC and therefore it was right to accept the four commitments.ReferencesBarnett, T. (31. October 2007). Maximizing Welfare through and through technological Innovation. From www.justice.gov http//www. justice.gov/atr/public/speeches/227291.htm Coca Cola Company, C. C. (31. December 2011). Anuual Report of Exchange. Von www.sec.gov http//www.sec.gov/ recital/edgar/data/21344/000002134412000007/a2011123110-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.