QUESTION
Q: Consider the issues raised by the current application before the ACCC for Visy to take over HP Plastic. What is the takeover proposed ? What kind of economic and social consequences are likely to results ?
This report should not be longer than 800 words (2 pages, font size 11), not including executive summary and references, and must make a coherent argument for your conclusions given your economic knowledge
SOLUTION
Executive Summary
ACCC is concerned about the proposed takeover of HP Plastics by Visy. This takeover would make Visy one of the two largest firms in the packaging industry, other being the Pact Group. As Raphael Geminder (Pact Group) and Anthony Pratt (Visy) have family relations, there is a possibility of cartel formation in the industry. Such a cartel would adversely affect consumers and competition. After careful examination of the issue, it can be concluded that such a cartel cannot be sustained due to market forces available. This report attempts to analyze the issue comprehensively.
Introduction
Visy, manufacturer of plastic packaging containers and owned by Anthony Pratt, has proposed to takeover HP Plastic for its inorganic growth. But ACCC (Australian Competition and Consumer Commission) has expressed concerns about shift of power to Pratt family in plastic packaging business after the proposed takeover. Such power may give rise to cartel formation and outrageous increase in price. This report analyzes the concerned issue subjectively.
Packaging Industry
Australian packaging industry ($AUD 7-7.5 Billion) is very small compared to world industry ($USD 300 Billion). 30% of the industry is related to plastic containers. The main business of the firms of packaging industry is to manufacture and supply PET containers, non-PET containers and small industrial plastic containers.
There are various small and large firms that operate in any one or more of the given manufacturing activities. HP Plastics, Visy and Pact Group are among the market leaders. Visy produced 2 Billion bottles during 2010-11. After the proposed takeover, Visy and Pact Group would become the two largest player of the market.
ACCC is an authoritative government department that looks after consumer protection and fair market competition. Every merger/ takeover is required to be approved from ACCC. ACCC prevents monopoly, cartel formation and other economic vices to promote fair competition in the market and to protect consumer rights.
Stakeholders involved with the issue
When Visy proposed for takeover of HP Plastics, ACCC raised concerns about cartelization and unjustified price increase in the packaging industry. There are various stakeholders associated with the said issues. Their details and association is explained below.
Concerned Parties (Visy, Pact and HP Plastics): The companies that are directly connected to the concerns are the main stakeholders.
Firms in Packaging Industry: Firms in packaging industry are also stakeholders in this case because they may be affected adversely if a cartel is formed between Visy and Pact Group after the takeover.
ACCC: ACCC is Australian authority that observes market and competition to maintain fair trade practices for the benefits of the consumers. The proposed takeover would change the power equation in the packaging industry. If a cartel is formed, consumers will face price rise in the plastic products. Therefore ACCC is directly concerned with the issue.
Community: Consumers are also stakeholders in the issue because they might be affected from the consequences of the proposed takeover.
Economic and Social Consequences of the takeover
The proposed takeover of HP Plastics would have a substantial effect on packaging industry at New South Wales and Victoria. The economic and social consequences of the takeover are provided below:
1. Visy would become the largest manufacturer in the packaging industry. Visy can enjoy economies of scale and benefits from synergies between Visy and HP Plastics.
2. The proposed takeover will change the power equation in packaging industry. Visy and Pact Group will become the two main players having the major market share.
3. Visy and Pact Group are main competitors in packaging industry. Owners of both the firms, Anthony Pratt and Raphael Geminder are related. After the proposed takeover, it is possible that Pact Group may conspire with Visy to reign the market. ACCC is concerned about such cartel formation because of ill reputation of Pratt family. Mr Richard Pratt, late patriarch of Pratt family was accused and charged for adopting similar malpractice. This concerned is in line with history as oil prices increased drastically in 1973 after OPEC was formed (http://wps.aw.com/). Graph of crude oil price (USD) over the years is given below.
4. HP Plastics has low market presence in non-PET manufacturing. Therefore the impact will be mainly on PET manufacturing units and consumers.
4. There are several other firms in packaging industry, which would provide fierce competition to the Visy after the takeover and therefore monopolistic price increase seem far-fetched. It is evident by the fact that customers have already started enquiring about alternate manufacturers in case a cartel is formed to raise the prices.
6. Large consumers of plastic containers may start in-house manufacturing or may support small manufacturing firms to avoid high price from Visy and Pact in case of monopolistic price increase. Such a step is feasible due to low entry barrier of the industry.
Conclusion
I concede with the decision made by ACCC regarding the proposed takeover of HP Plastic by Visy. As analyzed above, it can be surmised that market forces would come into play if a cartel if formed between Visy and Pact Group after the takeover. Due to availability of large number of firms in the industry and low production costs, Visy and Pact Group would not be able to sustain any cartel. Considering all the facets of the issue, it is advisable to allow proposed takeover so that Visy can reap the benefits of inorganic growth.
Reference List
Ai Group. (2005). The Australian Packaging Industry.The packaging council of Australia.
Bishop, Simon and Mike Walker. (1999).The Economics of EC Competition Law. Sweet and Maxwell.
Butler Ben. (2012). ACCC way of Pratt Dominance.Business Day, [online] 1 March. Available at: <http://www.brisbanetimes.com.au/business/accc-wary-of-pratt-dominance-20120229-1u3au.html> [Accessed on 28 April 2012].
Mankiw N. Gregory. (2010). Principles of Macroeconomics. 6th ed. Mason: Cengage Learning.
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