ECON 2400 Lecture Notes - Lecture 28: Income Approach, Final Good

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20 Apr 2017

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An example with inventory investment and an example with international trade. One component of investment expenditures is inventory investment, which consists of any goods that are produced during the current period but are not consumed. Stocks of inventories consist of inventories of finished goods (e. g. , automobiles that are stored on the lot), goods in process (e. g. , automobiles still on the assembly line), and raw materials. Suppose in our running example that everything is identical to the above, except that the coconut producer produces. 13 million coconuts instead of 10 million, and that the extra 3 million coconuts are not sold but are stored as inventory. Note that we value the coconut inventory at the market price of coconuts in the example. In practice, this need not be the case; sometimes the book value of inventories carried by firms is not the same as market value, though sound economics says it should be.

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Proposed Merger Between Heinz and Beech-Nut Scrutinized

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.

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 âvalue brandâ 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 âfixed trade spendingâ (also known as âslotting feesâ or âpay-to-stayâ 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 Page 2spending is âvariable trade spending,â which typically consists of manufacturers' discounts and allowances to supermarkets to create retail price differentials that entice the consumer to purchase their 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 âdifficult and improbable.â This finding seems to eliminate the possibility that the reduced competition caused by the merger will be ameliorated by new competition from outsiders.

Page 3

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 âsmall but significant and non-transitory increase in price.â

Perhaps most important is the indisputable fact that the merger will eliminate competition at the wholesale level between the only two competitors for the âsecond shelfâ 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 âslotting fees,â âpay-to-stayâ 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 âcan enhance the merged firm's ability and incentive to compete, which may result in lower prices, improved quality, or new products.â

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 âefficienciesâ 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 âwill achieve substantial cost savings in salaries and operating costs.â 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

Pleasee help me answer

I. Research: In this section, you will apply economic theory and quantitative analysis to your research topic.

A. Describe the relationship between the economic factors you identified and the presented issue.

B. Using mathematical concepts, illustrate the relationships between economic factors and the issue.

C. Describe the market structure of your organizationâs industry.

D. Determine how the market structure of the industry influences the issue. Support your response with relevant examples from the case.

1. Which of the following groups of countries are all advanced economies?

		Hong Kong, Japan, France, and the United Kingdom
		Italy, the United States, China, and Russia
		Singapore, Russia, France, and Chad
		Australia, Brazil, and the United States

QUESTION 2

1. The most people live in ________ economies and the fewest people live in ________ economies.

		developing; emerging market
		advanced; emerging market
		emerging market; developing
		advanced; developing

QUESTION 3

1. Households and firms in the U.S. economy interact with those in the rest of the world in the ________ market and the ________ market.

		goods; financial
		government; goods
		goods; factor
		financial; factor

QUESTION 4

1. As a factor of production, oil reserves are counted as

		labor.
		capital.
		entrepreneurship.
		land.

QUESTION 5

1. ________ the owners of the factors of production, while ________ what amounts of those factors to hire.

		Households are; the government determines
		Firms are; households that determine
		The government is; firms determine
		Households are; firms that determine

QUESTION 6

1. The emerging market economies are

		the nations that are currently agricultural in nature.
		most of the nations of Western Europe.
		the largest grouping including the nations of China and India.
		in the transition from state-owned production to free markets.

QUESTION 7

1. In the United States, the productive factor that, as a group, receives the largest fraction of the nation's total income was

		consumption of goods and services.
		entrepreneurship.
		capital.
		labor.

QUESTION 8

1. Items bought by individuals to provide personal enjoyment are termed

		personal goods.
		consumption of goods.
		consumption or investment goods.
		standard goods.

QUESTION 9

1. In the advanced economies, ________ of the factories use advanced capital equipment and in the developing economies ________ of the factories use advanced capital equipment

		virtually all; none
		some; some
		virtually all; virtually all
		virtually all; some

QUESTION 10

1. The productive resource that includes all the "gifts of nature" is called

		land.
		labor.
		entrepreneurship.
		capital.

QUESTION 11

1. What would be an example of government good?

		Donald Trump purchases furniture for his office.
		Antonio, the manager of the local Taco Hut, purchases a new deep fryer.
		The local driver's license office purchases a new digital camera and printer.
		Jake buys an iPhone.

QUESTION 12

1. The world population is approximately ________ people.

		2 trillion
		680 million
		6.8 billion
		6.8 million

QUESTION 13

1. Computers and insurance coverage produced in the United States and sold to people in other nations are categorized as

		U.S. exports of goods and services.
		U.S. government goods and services.
		foreign capital goods.
		U.S. consumer goods and services.

QUESTION 14

1. Of the following, the federal government obtains most revenue from

		corporate income taxes.
		excise taxes.
		sales taxes.
		social security taxes.

QUESTION 15

1. Items bought by businesses to help produce other goods and services are called

		capital goods.
		government goods and services.
		consumption of goods and services.
		exports of goods and services.

QUESTION 16

1. The majority of the income earned in the United States is paid in

		profit.
		interest.
		rent.
		wages.

QUESTION 17

1. Dan missed class the day the professor covered the circular flow model. Dan asked his friend Joan to explain markets to him. Joan correctly stated that a market

		must include a written contract between buyers and sellers.
		requires a physical location for buyers and sellers to get together.
		is only a place to purchase groceries.
		is an arrangement that brings buyers and sellers together.

QUESTION 18

1. The United States possesses a large amount of human capital. As a result of this fact, in the United States, there is a

		highly skilled and educated labor force.
		a large number of kind and generous humans.
		a large number of people and a great deal of land.
		a large amount of machinery and equipment.

QUESTION 19

1. Which of the following correctly lists the categories of factors of production?

		labor, machines, buildings, capital, and entrepreneurship
		land, buildings, capital, and entrepreneurship
		land, labor, capital, and entrepreneurship
		forests, fish, buildings, capital, and entrepreneurship

QUESTION 20

1. Which of the following correctly lists the categories of factors of production?

		capital, money, and labor
		hardware, software, land, and money
		land, labor, capital, and entrepreneurship
		machines, buildings, land, and money

QUESTION 21

1. In the United States, the poorest 20 percent of households receive roughly ________ percent of total income.

		10
		3
		15
		20

QUESTION 22

1. What would be an example of a consumption service?

		Jake buys an iPhone.
		The local driver's license office purchases a new digital camera and printer.
		Antonio, the manager of the local Taco Hut, purchases a new deep fryer.
		Rhianna gets a haircut.

QUESTION 23

1. The total value of capital in the United States is around

		$47 trillion.
		$10 trillion.
		$100 trillion.
		$79 trillion.

QUESTION 24

1. An export good is a good produced

		by foreigners in the United States and purchased by U.S. households.
		in another country and purchased by U.S. residents.
		in the United States and sold to foreigners living in the United States.
		in the United States and sold in other countries.

QUESTION 25

1. ________ paid for the use of land; ________ paid for the services of labor; and ________ paid for the use of capital.

		Interest is; wages are; profit is
		Rent is; wages are; interest is
		Rent is; interest is; wages are
		Mortgages are; interest is; wages are

fuchsiareindeer89

1. Which of the following groups of countries are all advanced economies?

		Hong Kong, Japan, France, and the United Kingdom
		Italy, the United States, China, and Russia
		Singapore, Russia, France, and Chad
		Australia, Brazil, and the United States

QUESTION 2

1. The most people live in ________ economies and the fewest people live in ________ economies.

		developing; emerging market
		advanced; emerging market
		emerging market; developing
		advanced; developing

QUESTION 3

1. Households and firms in the U.S. economy interact with those in the rest of the world in the ________ market and the ________ market.

		goods; financial
		government; goods
		goods; factor
		financial; factor

QUESTION 4

1. As a factor of production, oil reserves are counted as

		labor.
		capital.
		entrepreneurship.
		land.

QUESTION 5

1. ________ the owners of the factors of production, while ________ what amounts of those factors to hire.

		Households are; the government determines
		Firms are; households determine
		The government is; firms determine
		Households are; firms determine

QUESTION 6

1. The emerging market economies are

		the nations that are currently agricultural in nature.
		most of the nations of Western Europe.
		the largest grouping including the nations of China and India.
		in the transition from state-owned production to free markets.

QUESTION 7

1. In the United States, the productive factor that, as a group, receives the largest fraction of the nation's total income was

		consumption of goods and services.
		entrepreneurship.
		capital.
		labor.

QUESTION 8

1. Items bought by individuals to provide personal enjoyment are termed

		personal goods.
		consumption of goods.
		consumption or investment goods.
		standard goods.

QUESTION 9

1. In the advanced economies, ________ of the factories use advanced capital equipment and in the developing economies ________ of the factories use advanced capital equipment

		virtually all; none
		some; some
		virtually all; virtually all
		virtually all; some

QUESTION 10

1. The productive resource that includes all the "gifts of nature" is called

		land.
		labor.
		entrepreneurship.
		capital.

QUESTION 11

1. What would be an example of government good?

		Donald Trump purchases furniture for his office.
		Antonio, the manager of the local Taco Hut, purchases a new deep fryer.
		The local driver's license office purchases a new digital camera and printer.
		Jake buys an iPhone.

QUESTION 12

1. The world population is approximately ________ people.

		2 trillion
		680 million
		6.8 billion
		6.8 million

QUESTION 13

1. Computers and insurance coverage produced in the United States and sold to people in other nations are categorized as

		U.S. exports of goods and services.
		U.S. government goods and services.
		foreign capital goods.
		U.S. consumer goods and services.

QUESTION 14

1. Of the following, the federal government obtains most revenue from

		corporate income taxes.
		excise taxes.
		sales taxes.
		social security taxes.

QUESTION 15

1. Items bought by businesses to help produce other goods and services are called

		capital goods.
		government goods and services.
		consumption of goods and services.
		exports of goods and services.

QUESTION 16

1. The majority of the income earned in the United States is paid in

		profit.
		interest.
		rent.
		wages.

QUESTION 17

1. Dan missed class the day the professor covered the circular flow model. Dan asked his friend Joan to explain markets to him. Joan correctly stated that a market

		must include a written contract between buyers and sellers.
		requires a physical location for buyers and sellers to get together.
		is only a place to purchase groceries.
		is an arrangement that brings buyers and sellers together.

QUESTION 18

1. The United States possesses a large amount of human capital. As a result of this fact, in the United States, there is a

		highly skilled and educated labor force.
		a large number of kind and generous humans.
		a large number of people and a great deal of land.
		a large amount of machinery and equipment.

QUESTION 19

1. Which of the following correctly lists the categories of factors of production?

		labor, machines, buildings, capital, and entrepreneurship
		land, buildings, capital, and entrepreneurship
		land, labor, capital, and entrepreneurship
		forests, fish, buildings, capital, and entrepreneurship

QUESTION 20

1. Which of the following correctly lists the categories of factors of production?

		capital, money, and labor
		hardware, software, land, and money
		land, labor, capital, and entrepreneurship
		machines, buildings, land, and money

QUESTION 21

1. In the United States, the poorest 20 percent of households receive roughly ________ percent of total income.

		10
		3
		15
		20

QUESTION 22

1. What would be an example of a consumption service?

		Jake buys an iPhone.
		The local driver's license office purchases a new digital camera and printer.
		Antonio, the manager of the local Taco Hut, purchases a new deep fryer.
		Rhianna gets a haircut.

QUESTION 23

1. The total value of capital in the United States is around

		$47 trillion.
		$10 trillion.
		$100 trillion.
		$79 trillion.

QUESTION 24

1. An export good is a good produced

		by foreigners in the United States and purchased by U.S. households.
		in another country and purchased by U.S. residents.
		in the United States and sold to foreigners living in the United States.
		in the United States and sold in other countries.

QUESTION 25

1. ________ paid for the use of land; ________ paid for the services of labor; and ________ paid for the use of capital.

		Interest is; wages are; profit is
		Rent is; wages are; interest is
		Rent is; interest is; wages are
		Mortgages are; interest is; wages are

ivorybear711

ECON 2400 Lecture Notes - Lecture 28: Income Approach, Final Good

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