Economics at the FTC: Fertilizer, Consumer Complaints, and Private Label Cereal

Abstract

Staff in the FTC’s Bureau of Economics perform economic analyses to support the Commission’s missions to protect consumers and maintain competition. Staff contributions include both original economic research and theoretical and empirical analysis in specific matters where the Commission has to decide whether to take enforcement actions. This article describes: retrospective research of a consummated merger in the fertilizer industry; a novel analysis of the government’s consumer complaint data to understand how frauds affect different demographic groups; and casework that supported a decision to challenge a merger of private label ready-to-eat cereal manufacturers.

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Notes

  1. 1.

    See FTC Annual Highlights 2019, Stats & Data at https://www.ftc.gov/reports/annual-highlights-2019/stats-and-data.

  2. 2.

    See https://www.consumerfinance.gov/about-us/events/archive-past-events/cfpb-symposium-behavioral-economics/.

  3. 3.

    A print transcript as well as a video recording are available at https://www.ftc.gov/news-events/events-calendar/ftc-hearing-14-merger-retrospectives.

  4. 4.

    The conference website is located at https://www.ftc.gov/news-events/events-calendar/twelfth-annual-federal-trade-commission-microeconomics-conference.

  5. 5.

    Details are available at: https://www.ftc.gov/news-events/events-calendar/thirteenth-annual-federal-trade-commission-microeconomics-conference.

  6. 6.

    See, for example, Fuglie et al. (2012) from the Economic Research Service of the U.S. Department of Agriculture and Shields (2010) from the Congressional Research Service. However, note also that a Government Accountability Office (2009) analysis found that “Based on our review, empirical economic literature has not established that concentration has adversely affected commodity or food prices in these agricultural sectors.”

  7. 7.

    See https://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/ag-and-food-sectors-and-the-economy/.

  8. 8.

    Reuters, “Potash Corp, Agrium talk merger; competition scrutiny expected.” August 30, 2016.

  9. 9.

    See https://www.compasslexecon.com/cases/compass-lexecon-assists-in-obtaining-regulatory-approval-for-36-billion-merger/.

  10. 10.

    Nutrien, Ltd. Press Release, “Agrium and PotashCorp Merger Completed Forming Nutrien, a Leader in Global Agriculture.”

  11. 11.

    Federal Trade Commission, “FTC Requires Canadian Fertilizer and Chemical Companies PotashCorp and Agrium to Divest 2 Production Facilities as Condition of Merger.”

  12. 12.

    Agrium press releases on October 18, 2017 and November 7, 2017. PotashCorp also had a minority investment in a Chinese potash subsidiary, which it was required to convert to a passive stake.

  13. 13.

    Potash can also be harvested from the brines in certain saltwater bodies, using solar evaporation. This method accounts for less than 15 percent of global potash capacity.

  14. 14.

    See https://www.mining.com/ks-bethune-mine-canada-churns-first-tonnes-potash/23/.

  15. 15.

    See https://www.canpotex.com/our-business/marketing/our-potash-markets/brazil; import figures from Nutrien’s 2018 Factbook,

  16. 16.

    Industry reports, as well as market participants, often refer to a single contract between an exporter and several buyers in China (and likewise for India). See, e.g., Canpotex News Release, “Indian Companies to Buy More Saskatchewan Potash,” Nov. 20, 2014; describing an “Enhanced Market Development Agreement” between Canpotex and three Indian companies, the signing of which was witnessed by the Canadian premier and representatives of the Indian Ministry of Agriculture. See also Kulkarni, K. and R. Nickel, “India has enough potash to keep Canpotex waiting,” The Globe and Mail, Jan. 17, 2013; noting that “India and China have long bought potash through contracts, rather than on the spot market from the big producers, and usually at market-low prices. China signed its most recent deal in December, ending a long holdout, and India last inked a contract in August 2011.”

  17. 17.

    K + S does not participate in Canpotex; see “K + S says EU law keeps it from joining Canpotex”, Reuters, Nov. 29, 2011.

  18. 18.

    A. McDonald, “How a Potash Cartel Collapsed,” The Wall Street Journal, Dec. 14, 2015.

  19. 19.

    U.S. Geological Survey, Phosphate Rock Statistics and Information.

  20. 20.

    World Bank, “Fertilizer Market Outlook”, June 3, 2019.

  21. 21.

    See https://www.kpluss.com/en-us/press/press-releases/KS-reduces-potash-production/.

  22. 22.

    K. Keen (S&P Global Market Intelligence), “Potash cuts aimed at bolstering spot prices amid weak market, analysts say”, Sep. 13, 2019. Note, however, that Mosaic’s decision to idle its Colonsay mine is somewhat offset by its planned opening of a new, lower cost mine (known as “K3”) nearby.

  23. 23.

    P. Sinkewicz, “Potash production faces challenge of cost vs. market price”, The Saskatoon Star-Phoenix, May 24, 2019.

  24. 24.

    Mosaic Plant Nutrient Price Dashboard, available at http://www.mosaicco.com/resources/3185.htm.

  25. 25.

    Notably, the FTC’s required divestitures aimed to do just that. It is also worth noting that the divested facilities are somewhat removed from the spot prices that are available in the Mosaic data. The nitrogen facility produced only nitric acid, which is a feedstock in the production of nitrogen fertilizer (urea) but also has industrial uses. The FTC complaint noted that the affected customers in the nitrogen divestiture ranged from Kentucky to New Jersey. The divested phosphate facility produced a liquid phosphate fertilizer, which is distinct from the dry fertilizer (DAP) that is used in this study. As noted in the FTC’s complaint, the price difference between liquid and dry phosphate “has at times expanded significantly without prompting customers to shift their purchases from liquid to dry phosphate fertilizers.” See footnote 11.

  26. 26.

    Capacity additions in Morocco—home to 70 percent of global phosphate reserves—combined with weak demand appeared to drive the DAP price decline in 2019. See World Bank, “Fertilizer Market Outlook,” footnote 23. By contrast, potash capacity additions—including, notably, K + S’s mine in Canada—fell short of projected 2019 production.

  27. 27.

    Average U.S. Corn Prices Received from USDA, available at http://www.nass.usda.gov/Charts_and_Maps/Agricultural_Prices/pricecn.php. Saskatchewan mining wages from Statistics Canada, Table 14-10-0205-01, Average hourly earnings for employees paid by the hour, by industry, monthly, unadjusted for seasonality. Results are generally robust to exclusion of these controls, neither of which is perfect. As noted above, higher potash prices could be a cause of higher corn prices. Likewise, as discussed below, the merger could potentially enhance monopsony power and affect mining wages.

  28. 28.

    See https://www.ftc.gov/exploredata for more details.

  29. 29.

    See https://www.ftc.gov/ enforcement/consumer-sentinel-network for more details on the Consumer Sentinel Network.

  30. 30.

    In two payday loan related cases, the FTC alleged that companies purchased payday loan applications and used them to withdraw money from consumers’ bank accounts without their consent (Ideal Financial) or offer them deceptively marketed credit cards (Platinum Trust). In the WinFixer case, the FTC alleged a company falsely claimed that security scans had found malware on consumers’ computers, and then sold software to fix the identified problems. In the SimplePure case, the FTC alleged that a company marketed dietary supplements with deceptive health claims, as well as enrolling consumers in a negative option program (automatic subscription billing) without their consent. In three cases, the FTC alleged that companies deceptively offered a business opportunity or business coaching when no such opportunity existed. Finally, in the PHLG case, the FTC alleged that a company served as an intermediary in the transfer of money from US consumers to call centers in India operating different imposter frauds. See Appendix A of Raval (2020a) for more details of these cases.

  31. 31.

    “Combating Fraud In African American & Latino Communities: The FTC’s Comprehensive Strategic Plan”, see.

    https://www.ftc.gov/system/files/documents/reports/combating-fraud-african-american-latino-communities-ftcs-comprehensive-strategic-plan-federal-trade/160615fraudreport.pdf.

  32. 32.

    A list of Common Ground events and Ethnic Media briefings can be found at www.consumer.gov/commonground. A list of the state webinars can be found at www.consumer.gov/statewebinars.

  33. 33.

    The literature on personality psychology has found that five primary factors—Openness to Experience, Conscientiousness, Agreeableness, Extraversion, and Neuroticism—can explain much of differences in psychological traits across individuals and can be measured through survey questionnaires.

  34. 34.

    https://www.ftc.gov/enforcement/cases-proceedings/191-0128/post-holdings-inc-matter.

  35. 35.

    https://www.ftc.gov/news-events/press-releases/2019/12/ftc-alleges-post-holdings-incs-proposed-acquisition-treehouse.

  36. 36.

    https://www.ftc.gov/system/files/documents/cases/d09388posttreehousecomplaint.pdf.

  37. 37.

    https://www.ftc.gov/news-events/press-releases/2020/01/statement-ian-conner-director-ftc-bureau-competition-regarding.

  38. 38.

    This investigation was performed with close coordination with staff from the FTC’s Bureau of Competition. It was wide ranging, and included both quantitative and qualitative elements. This article discusses only the quantitative analyses.

  39. 39.

    The purpose of this article is to describe the analyses that were performed by the Bureau of Economics in this case, not the claims made by the parties or by the economists that they retained, the analyses that they performed, or how BE staff responded to them.

  40. 40.

    The focus is on “benefits” instead of “profits” because product-specific profits are not the only criterion that retailers use in deciding whether to stock a product. A retailer may stock some products that are less profitable than other products to which they could assign the same shelf space would be, in the interest of variety or customer convenience or some other factor that influences store-wide appeal and hence store-wide profitability.

  41. 41.

    This analysis implicitly assumes that the gap between the benefits to the retailer from the least-beneficial product that it stocks and the most-beneficial product that it does not stock is small. Given the large number of products that are stocked by a typical grocery retailer, this assumption is probably valid.

  42. 42.

    As will be discussed below, a key input into the merger simulation models is the wholesale market elasticity of PL cereal. In principle, this elasticity could capture the entire quantity response to a price increase, including both reduced quantity demanded at retailers where the product remains on the shelf and also eliminated sales at retailers where the product was removed from the shelf. However, our elasticity estimate is derived from data in which the PL cereal product in question is on the shelf. For this reason, the price ceiling analysis discussed above was performed separately from the merger simulation analysis. The former analysis showed that the gap between the pre-merger prices and the price ceiling was large enough that the ceiling could be mostly ignored as a binding constraint, at least for the important varieties of PL cereal. That is, in most instances the price effects that were predicted by the merger simulation model can be used without modification. In those instances where the merger simulation model predicted price increases that were larger than the gap between pre-merger prices and the price ceiling, the predicted price increase would simply equal the size of the gap.

  43. 43.

    The Horizontal Merger Guidelines (U.S. DOJ & FTC 2010) recognize cost savings as cognizable if they are achievable only via the merger, have been verified, and do not arise from anticompetitive reductions in output.

  44. 44.

    Though a given variety of PL cereal made by one manufacturer is often quite similar to that made by another, the products are differentiated both vertically in terms of quality and horizontally in terms of product attributes. This is confirmed by qualitative evidence and also by the relatively high price-cost margins for PL cereal manufacturers.

  45. 45.

    Alternatively, the merged entity might discontinue some of its products.

  46. 46.

    The description in the text is of a single auction. However, the SSA model employed here is based on the assumption that manufacturers participate in a large number of small auctions, in which each manufacturer wins at least once (they each have a positive share) and in each of which their probability of winning the auction is determined according to the logit assumption of substitution according to share. Since the number of retailers in the U.S. that sell PL cereal is large, this seems to be a reasonable context for the SSA.

  47. 47.

    One tool that can be used readily to implement these merger simulations is the “Antitrust” R Package developed by Charles Taragin and Michael Sandfort. This tool allows for calculation of the CMCR in the Bertrand model, as well as the evaluation of marginal cost efficiencies that allows one to calculate something akin to a CMCR for the SSA model that represents the change in each merged firm’s marginal cost that is necessary to equate the merged firm’s pre-merger and post-merger expected equilibrium prices. At the risk of abusing terminology, we refer to this as our measure of CMCR in the SSA analysis presented here, although we note that it also bears some resemblance to our analyses of efficiencies that leave aggregate consumer surplus—but not prices—unchanged in the Bertrand model. See https://cran.r-project.org/web/packages/antitrust/index.html.

  48. 48.

    The retailer is assumed to stock a PL product for the emulation in question—the price ceiling that was discussed above does not bind—and the choice is assumed to consist of Post, TreeHouse, Gilster Mary-Lee, and the fringe (all of the fringe firms were combined into a single choice). One of the properties of the logit model is that it assumes that the closeness of substitution between different products in the choice set is proportional to share. A product with a large share is considered a closer competitor for all of the other products than is a product with a low share. In this case, Post and TreeHouse were likely closer substitutes for each other, and more distant substitutes for Gilster Mary-Lee, than the shares would suggest. See https://www.ftc.gov/system/files/documents/cases/d09388posttreehousecomplaint.pdf. Because of this, the models may have understated the true merger effect.

  49. 49.

    This is more than the minimum amount of information that is required to run the model, so the model is over-identified. The minimum information that is required depends on the version of the model. In the simplest version only one margin is needed, and in richer versions two margins are needed.

  50. 50.

    As discussed above, this elasticity is derived from data in which the PL cereal products in question are on the shelf, and so it does not account for the possibility that the product will be removed from the shelf in response to a small price increase. The merger simulation results represent the predicted price changes as long as they do not cause the price ceiling to bind. Because of the large gaps between the pre-merger prices and the price ceilings (at least for the important PL cereal emulations), this assumption is largely justified. But in those instances where the price increases that are predicted by the merger simulation are greater than the gap, the predicted price increase is assumed to equal the gap.

  51. 51.

    Among the advantages of using the wholesale market elasticity as the key input is that it captures the effect of downstream retailer markups. Higher wholesale prices are passed through to higher retail prices, which reduces the quantity sold, dampening the incentive to increase prices. To the extent that upstream manufacturers take this into account, it will be captured by the wholesale market elasticity.

  52. 52.

    A similar derivation appears in Hosken et al. (2002).

  53. 53.

    A well-known paper (Nevo 2001) finds a low (in absolute value) elasticity for cereal before correcting for endogeneity, and a much higher elasticity after correcting for it. Other researchers have debated whether endogeneity is present, whether it necessarily biases estimates downwards, and whether Nevo’s instrumental variables approach to correcting it is valid. Matters are further complicated by the fact that cereal is a product that consumers buy in large quantities and then stockpile when it goes on sale. This may indicate a higher elasticity than would exist in response to a permanent price change. There is also one paper that uses a different, experimental approach (i.e., intentionally manipulated real-world prices in order to measure the quantity response), which found a low elasticity (Fong et al. 2011). There was also some non-public, case-specific information that appeared to support a lower elasticity estimate.

  54. 54.

    In particular, if the bidders have incomplete information about their competitors’ costs, the objective functions are analogous.

  55. 55.

    https://www.ftc.gov/system/files/documents/cases/d9388_r_post_holdings_answerpublic.pdf.

  56. 56.

    https://www.ftc.gov/system/files/documents/cases/d9388_r_treehouse_answer_public.pdf.

  57. 57.

    To avoid disclosing non-public information, the magnitudes of estimated price effects or CMCRs are not reported. However, they are consistent in the sense that both the simulated price effects and the CMCRs were higher in the Bertrand model than in the SSA model.

  58. 58.

    The analyses of marginal cost reductions include calculation of CMCRs, as well as the consideration of cost reductions that would leave aggregate consumer welfare unchanged by the merger as discussed above. The results of those alternative analyses were consistent with the results that are presented in the main text.

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Acknowledgements

We thank Kathleen Daffan, Lois Greisman, Melissa Hill, Robin Moore, Rohan Pai, Jan Pappalardo, Patricia Poss, James Rhilinger, Kristian Rogers, Dave Schmidt, Aileen Thompson, and Mike Vita for helpful comments. The views that are expressed in this article are those of the authors and do not necessarily reflect those of the Federal Trade Commission or any of the individual Commissioners.

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Sweeting, A., Balan, D.J., Kreisle, N. et al. Economics at the FTC: Fertilizer, Consumer Complaints, and Private Label Cereal. Rev Ind Organ 57, 751–781 (2020). https://doi.org/10.1007/s11151-020-09792-w

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Keywords

  • Antitrust
  • Consumer protection
  • Efficiencies
  • Fraud
  • Merger retrospectives
  • Merger simulations