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In the 1980s, PepsiCo Inc., which then had 28 percent of the soft-drink market, proposed to acquire the Seven-Up Company. Shortly thereafter, the Coca-Cola Company, with 39 percent of the market, indicated it wanted to acquire the Dr Pepper Company. Seven-Up and Dr Pepper each controlled about 7 percent of the market. In your judgment, was the government’s decision to block these mergers appropriate?
In my opinion, the rightfulness of the decision would depend on the reasons underlying it. If the Herfindahl index after the merger exceeded and if the merger increased the index by at least points, then the decision to block the mergers was appropriate. Considering that PepsiCo still proposed a merger even if it already has a share of the market, a merger would have significantly reduced competition which would support the decision made.
However, if the merger was intended to save Seven-Up and Dr. Pepper from major and continuing losses, then the decision to block the merger was unjustified.
In this problem, we are asked to determine whether the government's decision to block the mergers was appropriate or not.
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