Home appliances are among the most significant purchases people can make. In 2014 alone, Americans spent over $5 billion on major cooking appliances. In September 2014, two of the three largest U.S. manufacturers of cooking appliances, General Electric and Electrolux (maker of Frigidaire products), announced plans to significantly consolidate the industry by merging their appliance businesses.
In July 2015, the Division sued to block the merger. The Division was concerned about the reduction in competition resulting from the merger, particularly for consumers who can only afford to purchase low-cost appliances and for homebuilders and contractors who purchase appliances through the “contract channel.” In most parts of the country, contractors cannot sell houses without a stove or an oven; and if one breaks, consumers must replace it immediately.
Trial began in early November 2015, and testimony was scheduled to end December 7. But very early on the morning of December 7, and after four weeks of trial, General Electric exercised its contractual right to walk away from the transaction along with a termination fee of $175 million.
Before General Electric made its announcement, the Division had put on 13 witnesses, including many executives from Electrolux or General Electric. And, at the urging of the Court, the parties had also provided frequent short presentations to help the Court better understand the application of the Sherman Act to the cooking appliances industry.
The trial testimony and arguments showed a clear story: Electrolux and GE were close competitors in an already highly concentrated cooking appliances industry.
Both companies were strong head-to-head competitors for cooking appliances overall, and were especially strong competitors for lower-priced ranges, ovens, and cooktops.
Along with Whirlpool, both Electrolux and GE were uniquely positioned to effectively satisfy the specific needs of the homebuilders and property managers who buy appliances through the contract channel.
The merger would have eliminated the direct competition between Electrolux and GE that has led to lower prices and higher quality for consumers. And, it would have also contributed to increased coordination among the small appliance makers.
As shown in Figure 1, GE and Electrolux controlled a huge portion of the cooking appliances market.
Figure 1
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Shares: overall markets
GE
28%
Electrolux
23%
Kenmore
11%
Whirlpool
26%
LG
3%
Samsung
6%
Other, includes
2%
These shares are for ranges (the combination cooktop and oven most of us have in our kitchens) that are by far the most common major cooking appliance.
As Figure 2 shows, the merging parties were especially significant competitors for ranges sold at the most affordable prices. GE, Electrolux (which also manufactures the cooking appliances sold under the Kenmore brand), and Whirlpool (the “Big 3”) collectively manufacture nearly all of the least expensive ranges sold in the U.S.
Figure 2
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Why these measures understate the likelihood of competitive harm
GE
32%
Electrolux
24%
Kenmore
16%
Whirlpool
28%
LG
0%
Samsung
1%
Other, includes
2%
The same was true in the contract channel, with manufacturers other than the Big 3 having a negligible presence.
GE and Electrolux controlled a huge portion of the cooking appliances market. But the Division’s evidence extended beyond their market shares.
Witnesses testified that the two companies competed vigorously to the benefit of American consumers. And the parties’ own documents backed that up. For example, GE maintained a “meeting competition” database that showed that Electrolux was by far its most frequent competitor for sales to builders and contractors, and a close third to Whirlpool in sales to retailers.
An analysis commissioned by Electrolux found, “Frigidaire cooking product buyers consider GE most often followed by Kenmore before making a purchase.” Confirming these findings, an Electrolux “Competitor Price Study” determined that “Whirlpool and GE are the Top 2 competitors for Electrolux in Cooking” and that, in particular, “GE poses very dense competition to Electrolux in CookTops [sic] and Ranges.”
One GE contract-channel executive complained that Electrolux is “out there with gut-wrenching pricing.” Another GE executive wrote that Electrolux was “getting more aggressive and going after single family customers in almost every market.” GE believed that Electrolux was doing so largely by offering lower prices, sometimes so low they were “scary.”
The Division bolstered the evidence from the documents and testimony by calling Professor Michael Whinston (an MIT economist), who testified that the merger was likely to substantially reduce competition. Dr. Whinston’s economic analysis showed that the merger created a significant unilateral incentive to raise price (an “upward pricing pressure” or “UPP”), as shown in Figure 3.
Figure 3
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Competitive effects: unilateral incentives to raise price
Ranges
Cooktops
Wall ovens
Electrolux
16%
47%
33%
GE
15%
13%
17%
These UPPs likely underestimate true upward pricing pressure
Claimed variable cost efficiencies for cooking are only 3.25%
He also addressed the defendants’ arguments that the sales of ranges, cooktops, and wall ovens through the contract channel did not constitute distinct antitrust markets. Professor Whinston was scheduled to provide his rebuttal testimony on December 7. However, he never got that chance. The defendants abandoned the merger after four weeks of trial. This abrupt end resulted in the termination of an anticompetitive merger and a victory for American consumers.
