Just follow the instruction, 2 case study in 2 files. Use basic economic concept and answer the following questions. and a important introduction. more details and inn the file.
econ_3620_case_study_project_fall_2019__1_.docx
monsanto.pdf
heinzandbeechnut.docx
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Econ 3620
Due: Dec 6th at 11:59PM
Case Study Project Instructions
I.
Description
The goal of this project is to allow you to explore something from the class in more detail and to
use real world cases to learn the concepts of managerial economics.
To this end, projects will l consist of the following:
•
•
II.
Reading and understanding the key details and economic concepts in each case study.
Answering the key questions with use of the managerial economics toolkit we have
developed in our class.
Case Studies
The case studies that you will be working with come from a wide array of industries and
examine a multitude of concepts from the perspective of managerial economics.
The Google Sheets Link below takes you to a signup sheet for choosing the two case studies
that you will work on.
https://docs.google.com/spreadsheets/d/1vQar9Now7iukVXmTiVjqdyL2PHTBM0klegvBAMDKG0/edit?usp=sharing
There are 2 sections and you will have to choose 1 case study from each section.
• You will notice that in the google sheet there are spaces for each of you to put your name
next to the case studies of your choice.
• These are limited as I do not want too many students working on the same cases.
• Choices will be made on a first come, first serve basis starting Wednesday, Oct 30th at
11am.
III.
Directions
1. Start by an in-depth reading of your case study.
2. Write a brief introduction about the contents of the case study.
a. Brief 1-2 paragraph introduction.
3. Answer the questions at the end of each case study.
a. Each answer should be no shorter than 1 complete paragraph and no longer than 1
whole page.
b. Use economic concepts to justify your answers where possible.
4. Look up the outcome of each study and write a paragraph about the resolution in your
own words.
a. For example, check to see if the company still exists and if not explain what
factors led to its downfall.
5. Submit as one document into Brightspace
Firms and Markets
Mini-Case
Monsanto’s Roundup®
Written August 2001, Revised July 14, 2003
When Pharmacia merged with troubled Monsanto in 1999, investors complained that
Monsanto would weigh down Pharmacia’s profits. Pharmacia apparently felt the same
way, keeping Monsanto’s drug unit, Searle, but selling 15% of the remaining company as
a precursor to dumping it altogether.
Investors couldn’t have been more wrong. Between Monsanto’s IPO in October 2000
and August 2001, its share price jumped 80%. Shares of Pharmacia (which still owns 85
percent of Monsanto) fell almost 20%.
How did Monsanto do it?
Monsanto
St Louis-based Monsanto was founded in 1901 to manufacture Saccharine. It soon added
vanilla, phenol, and aspirin. By 1990, Monsanto was a large diversified chemical
company producing nylon, plastics, films, hydraulic fluids, aspartame (Nutrasweet), and
pharmaceuticals (the last two through its Searle unit, acquired in 1985).
In the mid-1990s, Monsanto positioned itself as a high-growth “life sciences” company,
focusing on agriculture, food ingredients, and pharmaceuticals. When Robert Shapiro
took over as CEO in 1995, he pursued a vision of using cutting-edge science to generate
profits, raise living standards in developing countries, and produce a cleaner
environment. He added seed and genomics companies and spun off the basic chemicals
business. The strategy was to use the revenue generated by its hugely profitable
Roundup to finance research and development. Uncertainties associated with
biotechnology research and consumer fears of genetically modified foods, particularly in
Europe, led to the departure of Shapiro and the merger with Pharmacia.
Roundup
Monsanto’s leading product was Roundup, the trademarked name of glyphosate, a
chemical herbicide developed and patented by Monsanto in the 1970s. Roundup is
referred to as a nonselective herbicide, meaning it kills most plants. In the late 1990s, it
became the best-selling agricultural chemical of all time and an enormously profitable
product for Monsanto. This success was the result of several factors. One was a
conscious strategy to reduce price in the US, where patent protection gave it an effective
monopoly until September 2000. (Prices were lower outside the US, where patents
expired earlier.) Between 1995 and 2000, Monsanto reduced the price by an average of
9% a year. When volume increased by an average of 22% a year, revenue and profits
exploded. See Exhibits 1 and 2. Glyphosate-based herbicides produced net sales for
Monsanto of $2.4b in 2001 alone, nearly half the company’s total.
Another factor in Roundup’s success was the increasing popularity of conservation
tillage, an environmentally friendly method of farming in which crops are planted
without first plowing the fields. With less plowing, there is less loss of topsoil and
moisture. The problem is weeds. Instead of plowing them under, farmers eliminate
weeds before planting by applying a nonselective herbicide such as Roundup. Analysts
suggest that conservation tillage is sensitive to the price of herbicides, an important
element in its cost.
A third factor was the development of herbicide-tolerant crops. Monsanto’s Roundup
Ready corn was approved in 1998, and soybeans followed shortly thereafter. Monsanto
argued that Roundup and Roundup Ready seeds were complementary products, with
price reductions in one increasing demand for the other.
Even as patents expired, Monsanto was able to maintain high market shares. In Brazil,
for example, Monsanto’s patent expired in 1981, yet its 2001 market share was 81%. See
Exhibit 3. High market share, in turn, allowed Monsanto to exploit economies of scale
and work its way down the learning curve.
Postscript
Monsanto remains a high-risk company with strong upside potential. When the US
patent expired, Roundup revenue dropped sharply, leaving Monsanto increasingly reliant
on biotechnology. With exposure to Latin America compounding the fall in Roundup
revenue, the share price fell 50% in mid-2002, leading to the December resignation of
CEO Hendrik Verfaillie.
Questions
(a) How do you know that cutting the price of Roundup was a good idea for Monsanto?
(b) How might you estimate the elasticity of demand and the profit-maximizing price for
1995. Do you think Monsanto set the right price?
(c) If cutting price was a good idea, why didn’t Monsanto do it earlier?
Additional Information
•
•
•
Monsanto’s web site: http://www.monsanto.com
Bear Stearns Equity Research, “Monsanto: Yet another time of transition,”, January
9, 2003.
Salomon Smith Barney Equity Research, “Monsanto: A near-term catalyst is
lacking,” December 9, 2002.
Monsanto
Page 2
Notes
This case was prepared by Mariagiovanna Baccara, David Backus, Heski Bar-Isaac,
Luís Cabral, and Lawrence White for the purpose of class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation. The case
was motivated by the article “A weed killer is a block to build on,” by David Barboza,
New York Times, August 2, 2001. The authors thank Frank Mitsch at Bear Stearns for
supplying the data in Exhibits 1 and 2. © 2003 NYU Stern School of Business.
Monsanto
Page 3
Exhibit 1
Average Domestic and International Prices of Roundup, 1995-2002
(Solid line is US, dashed line is International.)
50
45
Dollars per Gallon
40
35
30
25
20
15
10
5
0
1995
1996
1997
1998
1999
2000
2001
2002
Source: Bear Stearns proprietary data.
Monsanto
Page 4
Exhibit 2
Average Domestic and International Volumes of Roundup, 1995-2002
(Solid line is US, dashed line is International.)
80
Millions of Gallons
70
60
50
40
30
20
10
0
1995
1996
1997
1998
1999
2000
2001
2002
Source: Bear Stearns proprietary data.
Monsanto
Page 5
Exhibit 3
National Market Shares After Patent Expiration
Country
Argentina
Australia
Brazil
Canada
France
United States
Patent Expiration
1984
1988
1983
1990
1991
2000
2001 Market Share
75%
91%
82%
95%
85%
98%
Source: Salomon Smith Barney.
Monsanto
Page 6
Proposed Merger between Heinz and Beech-Nut
Scrutinized1
OVERVIEW OF THE BABY FOOD MARKET
Four million infants in the United States consume 80 million cases of jarred baby food
annually, representing a domestic market of $865 million to $1 billion. The baby food market
is dominated by three firms, Gerber Products Company (Gerber), Heinz and Beech-Nut.
Gerber, the industry leader, enjoys a 65 percent market share while Heinz and Beech-Nut come
in second and third, with a 17.4 percent and a 15.4 percent share respectively. Gerber enjoys
unparalleled brand recognition with a brand loyalty greater than any other product sold in the
United States. Gerber’s products are found in over 90 percent of all American supermarkets.
By contrast, Heinz is sold in approximately 40 percent of all supermarkets. Its sales are
nationwide but concentrated in northern New England, the Southeast and Deep South and the
Midwest. Despite its second-place domestic market share, Heinz is the largest producer of baby
food in the world with $1 billion in sales worldwide. Its domestic baby food products with
annual net sales of $103 million are manufactured at its Pittsburgh, Pennsylvania plant, which
was updated in 1991 at a cost of $120 million. The plant operates at 40 percent of its production
capacity and produces 12 million cases of baby food annually. Its baby food line includes about
130 SKUs (stock keeping units), that is, product varieties (e.g., strained carrots, apple sauce,
etc.). Heinz lacks Gerber’s brand recognition; it markets itself as a “value brand” with a shelf
price several cents below Gerber’s.
Beech-Nut has a market share (15.4%) comparable to that of Heinz (17.4%), with $138.7
million in annual sales of baby food, of which 72 percent is jarred baby food. Its jarred baby
food line consists of 128 SKUs. Beech-Nut manufactures all of its baby food in Canajoharie,
New York at a manufacturing plant that was built in 1907 and began manufacturing baby food
in 1931. Beech-Nut maintains price parity with Gerber, selling at about one penny less. It
markets its product as a premium brand. Consumers generally view its product as comparable
in quality to Gerber’s. Beech-Nut is carried in approximately 45 percent of all grocery stores.
Although its sales are nationwide, they are concentrated in New York, New Jersey, California
and Florida.
At the wholesale level, Heinz and Beech-Nut both make lump-sum payments called “fixed
trade spending” (also known as “slotting fees” or “pay-to-stay” arrangements) to grocery stores
to obtain shelf placement. Gerber, with its strong name recognition and brand loyalty, does not
make such pay-to-stay payments. The other type of wholesale trade spending is “variable trade
spending,” which typically consists of manufacturers’ discounts and allowances to
supermarkets to create retail price differentials that entice the consumer to purchase their
1
Michael Baye and Patrick Scholten prepared this case to serve as the basis for classroom discussion
rather than to represent economic or legal fact. The case is a condensed and slightly modified version
of the public copy of the decision in FTC (Appellant) v. H.J. Heinz Co. and Milnot Holding Corporation
that was argued on February 12, 2001 and decided April 27, 2001. No. 00-5362. It has been updated
by Kyle Anderson, Michael Baye, and Jeffrey Prince.
Managerial Economics and Business Strategy, 9e
Page 1
product instead of a competitor’s.
On February 28, 2000 H.J. Heinz Company (Heinz) and Milnot Holding Corporation
(Beech-Nut) entered into a merger agreement. Under the terms of their merger agreement,
Heinz would acquire 100 percent of Beech-Nut’s voting securities for $185 million.
Arguments Supporting Anti-Competitiveness of Merger
The relevant product market was defined as jarred baby food and the geographic market as the
United States. Sufficiently large HHI figures indicate that a merger is anti-competitive. The
pre-merger HHI score for the baby food industry is 4775 — indicative of a highly concentrated
industry. The merger of Heinz and Beech-Nut will increase the HHI by 510 points. This
creates, by a wide margin, a presumption that the merger will lessen competition in the
domestic jarred baby food market.
It is probable that this merger will eliminate competition between the two merging parties at
the wholesale level, where they are currently the only competitors for the second position on
the supermarket shelves. Although Heinz and Beech-Nut claim that in areas that account for
80% of Beech-Nut sales, Heinz has a market share of about 2% and in areas that account for
about 72% of Heinz sales, Beech-Nut’s share is about 4%, there is evidence that Heinz and
Beech-Nut are locked in an intense battle at the wholesale level to gain (and maintain) position
as the second brand on retail shelves. Heinz’s own documents recognize the wholesale
competition and anticipate that the merger will end it. Indeed, those documents disclose that
Heinz considered three options to end the vigorous wholesale competition with Beech-Nut:
two involved innovative measures, while the third entailed the acquisition of Beech-Nut. Heinz
chose the third and least pro-competitive of the options.
Finally, the anticompetitive effect of the merger is further enhanced by high barriers to market
entry. Barriers to entry are important in evaluating whether market concentration statistics
accurately reflect the pre- and likely post- merger competitive picture. If entry barriers are low,
the threat of outside entry can significantly alter the anticompetitive effects of the merger by
deterring the remaining entities from colluding or exercising market power. Low barriers to
entry enable a potential competitor to deter anticompetitive behavior by firms within the
market simply by its ability to enter the market. Existing firms know that if they collude or
exercise market power to charge supra-competitive prices, entry by firms currently not
competing in the market becomes likely, thereby increasing the pressure on them to act
competitively. In this case, there had been no significant entries in the baby food market in
decades and new entry was “difficult and improbable.” This finding seems to eliminate the
possibility that the reduced competition caused by the merger will be ameliorated by new
competition from outsiders.
Arguments Supporting the Merger
Extent of Pre-Merger Competition
Heinz and Beech-Nut claim that they do not really compete against each other at the retail
level. They also contend that consumers do not regard the products of the two companies as
substitutes and generally only one of the two brands is available on any given store’s shelves.
Hence, there seems to be little competitive loss from the merger.
This argument has a number of flaws. First, there is evidence that Heinz and Beech-Nut do in
fact price against each other and that, where both are present in the same areas. There are at
least ten metropolitan areas in which Heinz and Beech-Nut both have more than a 10 percent
market share and their combined share exceeds 35 percent. They depress each other’s prices as
well as those of Gerber even though they are virtually never all found in the same store. By
defining the relevant product market generically as jarred baby food, it was found that in areas
where Heinz’s and Beech-Nut’s products are both sold, consumers will switch between them
in response to a “small but significant and non-transitory increase in price.”
Perhaps most important is the indisputable fact that the merger will eliminate competition at
the wholesale level between the only two competitors for the “second shelf” position.
Competition between Heinz and Beech-Nut to gain accounts at the wholesale level is fierce
with each contest concluding in a winner-take-all result. Fixed trade spending, which consists
of “slotting fees,” “pay-to-stay” arrangements, new store allowances and other payments to
retailers in exchange for shelf space and desired product display, does not affect consumer
prices. It is impossible to conclude with any certainty that the consumer benefit from
couponing initiatives would be lost in the merger.
Post-Merger Efficiencies
Heinz and Beech-Nut’s second argument is their contention that the anticompetitive effects of
the merger will be offset by efficiencies resulting from the union of the two companies,
efficiencies which they assert will be used to compete more effectively against Gerber. It is
true that a merger’s primary benefit to the economy is its potential to generate efficiencies. As
the Merger Guidelines now recognize, efficiencies “can enhance the merged firm’s ability and
incentive to compete, which may result in lower prices, improved quality, or new products.”
Nevertheless, the high market concentration levels present in this case require proof of
extraordinary efficiencies. Moreover, given the high concentration levels, a rigorous analysis
must be undertaken of the kinds of efficiencies being urged by the parties in order to ensure
that those “efficiencies” represent more than mere speculation and promises about post-merger
behavior.
Assuming that post-merger efficiencies will outweigh the merger’s anticompetitive effects, the
consolidation of baby food production in Heinz’s under-utilized Pittsburgh plant “will achieve
substantial cost savings in salaries and operating costs.” Heinz and Beech-Nut promise to
improve product quality as a result of recipe consolidation. Heinz’s distribution network is
much more efficient than Beech-Nut’s. Although Beech-Nut has an inefficient distribution
system, it can make that system more efficient without merger. Heinz’s own efficient
distribution network illustrates that a firm the size of Beech-Nut does not need to merge in
order to attain an efficient distribution system. The only cost reduction quantified as a
percentage of pre-merger costs was the so called “variable conversion cost”: the cost of
processing the volume of baby food now processed by Beech-Nut. This cost would probably
be reduced by 43% if the Beech-Nut production were shifted to Heinz’s plant.
The principal merger benefit asserted for Heinz is the acquisition of Beech-Nut’s better recipes,
which will allegedly make its product more attractive and permit expanded sales at prices lower
than those charged by Beech-Nut, which produces at an inefficient plant. Heinz agreed that the
taste of its products was not so bad that no amount of money could improve the brand’s
consumer appeal. That being the case, the question is how much Heinz would have to spend
to make its product equivalent to the Beech-Nut product and hence whether Heinz could
achieve the efficiencies of merger without eliminating Beech-Nut as a competitor.
Innovation
Heinz and Beech-Nut claim next that the merger is required to enable Heinz to innovate, and
thus to improve its competitive position against Gerber. Heinz and Beech-Nut asserted that
without the merger the two firms are unable to launch new products to compete with Gerber
because they lack a sufficient shelf presence or All Commodity Volume (ACV). Product
volume in retail stores throughout the country is measured by the product’s ACV. Gerber’s near
100 percent ACV is impressive because virtually all supermarkets stock at most two brands of
baby food. In at least one area of the country as many as 80 percent of supermarket retailers
stock only Gerber. In this case, given the old-economy nature of the industry as well as Heinz’s
position as the world’s largest baby food manufacturer, it is a particularly difficult defense to
prove. Heinz and Beech-Nut claim that new product launches are cost-effective only when a
firm’s ACV is 70% or greater (Heinz’s is presently 40%; Beech-Nut’s is 45%). This assertion
was based on a graph that plotted revenue against ACV. The graph showed that only four out
of 27 new products launched in 1995 had been successful–al …
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