D



Write-Up of Review Problem 1: The Staples Office Depot Merger

1) What is the significance to the case of each of the following pieces of evidence?:

A) The number of office supply items carried by K-Mart and Target (p.56 n.3): 570 v. 7000+ by OSS. Suggests K-Mart & Target cannot easily grow to become equivalent of OSS (Supply-Side Substitutability) and that stores are not interchangeable for large purchasers of office supplies (function)

B) Staples’ Fiscal Year 1995 Marketing Plan (p.57 n.4): Defines markets with other OSS as competitive; markets w/o other OSS as non-competitive. Because this is a planning document and not an off-the-cuff remark, good evidence that Staples believes its competition is other OSS (D/Industry behavior).

C) The Prudential Securities Pricing Studies:

• (p.58 n.8): Same basket of goods found at similar prices at OSS; 18-19% higher at Best Buy. Suggests Best Buy not competing with OSS. (D/Industry Behavior)

• (p.62): Study of 2 stores: on high visibility items, prices 5.8% lower in three-firm market than in two-firm market. Suggests more OSS in market increases competition, although may depend on relative costs & prices in two cities in general. (D/Industry Behavior)

D) The response of OfficeMax share prices to the merger announcement (pp.62-63): Study concludes share prices of third OSS would rise. This is consistent with a perception that the merger would increase prices due to increased concentration. It is inconsistent with a perception that prices would decline due to efficiencies (and therefore harm Office Max). By contrast, share prices of non-OSS office supply sellers were unchanged, suggesting a perception that they were not in the same market. (D/Industry Behavior)

E) The ability of office super stores to change their prices rapidly (p.63): As a result, the OSS could take advantage of concentrated markets to reap monopoly profits, then drop prices rapidly in response to new entrants. The OSS thus were not deterred from charging higher prices by the threat of potential entry and potential entrants might be reluctant to move into markets where their prices could rapidly be met or undercut. (Supply-Side Substitutability). However, this ability also would facilitate pass-throughs to consumers as soon as discounts become available, thus making more plausible the claim that savings would be passed on to consumers.

F) The physical appearance of office super stores (pp.69-70): Big difference in methods and appearance from other sellers of office supplies suggests consumers will use differently (function) or that the OSS are trying to signal to consumers that they are different. (D/Industry Behavior). The difference in size (and the resulting increased discounts) may discourage entry (Supply-Side Substitutability).

G) Staples’ historical pass-through rates (p.71 n.26): Historical rates of 15-17% make D’s claim of 2/3 pass-thru unlikely given own behavior and less competition ((D/Industry Behavior).

2) We discussed four different kinds of evidence of market definition. What examples of each kind were offered by the parties with regard to the product market in Staples [in addition to the evidence listed in answer to Question 1]?:

A) Function: All office supply sellers sell the same types of products. OSS have different appearance and method than others; sell substantially more products; and are designed for a different kind of shopping.

B) Market Performance: Little evidence of consumer behavior except pricing.

C) Defendant/Industry Behavior (Note court’s reliance on this category (p.70)):

• S’s internal documents mixed re who is competition; some suggest just OSS

• S believed it would have to reduce prices w/o merger

• S’s prices responded to number of OSS in market & not to others

• S when deciding whether to enter a market looked at number of competitors, not at prices in the market

• BUT past price decreases after mergers

D) Supply-Side Substitutability (Here, mostly about barriers to entry):

• Possibility of expansion by Wal-Mart etc, who already did some office supplies, but no evidence that other large discounters would increase market share in response to a price increase by Staples/Office Depot

• Pattern of building a number of OSS stores in one area suggests economies of scale/barriers to entry

3) Many newspapers and business publications commented (both pro and con) about the FTC intervention in the murder. What would be the FTC’s response to the following statements made in anti-FTC editorials?

A) “Consumers may like shopping in superstores, but they won’t tolerate higher prices if they can do better at the neighborhood family business, order from a catalog, or buy from one of the giant retailers like Wal-Mart.” – Chicago Tribune (3/22/97)

FTC Response: OSS is really a separate market. Higher prices at OSS still significantly below prices elsewhere. If prices currently, e.g., 20% lower, lots of room to increase OSS price before finding competition from other sellers.

B) “Selling office supplies is not like making cars: You don’t need hundreds of millions of dollars worth of special tools, a high barrier to entry. All you need for a group of office supply superstores is a few leases on large rooms to display the inventory.” – Boston Herald (3/13/97)

FTC Response: To compete with OSS, need sufficient size to get economies of scale from bulk discounts and widespread advertising. Expensive to purchase sufficient stock to attain sufficient size, which itself is a barrier to entry.

C) “[I]t’s unlikely that the merged new venture would raise prices …. More likely, the merger of these two heavyweights into an even bigger enterprise would do just the opposite. It would mean greater efficiency because one company would be dealing in greater volume, enabling the resulting venture to take on yet other competitors by dropping prices."”—Colorado Springs Gazette Telegraph (3/4/97)

FTC Response: There are no “other competitors” whose prices are lower. Given the lack of price competition, Staples’s historical low pass-through rates, and the evidence that prices already were higher in markets with fewer OSS competitors, there’s little reason to think prices would fall.

4) What plausible market definitions existed beside the one chosen by the court?

• All sellers of office supplies.

• All large discounting chains that sell office supplies

Do you think the court was correct in its definition? Why or why not? I think the evidence laid out here pretty strongly supports the court’s conclusion, particularly the unusually good evidence of pricing patterns in geographic markets with different numbers of competing OSS.

Segmentation of markets by price and by sales methods/styles is pretty common. E.g., restaurants: Fast food drive-through probably doesn’t compete much with sit-down only establishments. Relatively upscale establishments (Joe’s Stone Crab; Norman’s; Ortanique, etc.) don’t compete much with down market diners (IHOP; Denny’s etc.)

Note also: (p.72): Consequences of stopping merger seem good for consumers.

• OD & Staples both expand to size that merger would have produced .

• Competition between them increases.

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