Public Policy in Private
Markets
Debate 2
Merger wrap up
Announcements
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Today:
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Debate 3: 4/12 (video due to me by 4/10)
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Debate # 2
Pick up HW 3
Turn in HW 5
HW 6, posted and due on 4/12
Midterm # 2: 4/19
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Review: 4/18; 6-8 pm
More later
Midterm assessment
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Thanks for your participation!
Things that seem to work
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i>clicker
Cases
Options for grading
Fair grading (although stiff!)
Usefulness of PPT slides
Midterm assessment
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Things that need improvement
Midterm: unexpectedly hard, time issue
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This is a capstone course (expected)
I failed in conveying the correct expectation
Let me work on this:
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Practice test will be posted prior to the exam
You can turn in practice test the day of the review
I will post answer key after review session
You can get extra points for doing this (provided
you look at the key and let me know how you
would have improved your answers after looking
at answer key)
Midterm assessment
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Things that need improvement
Midterm/grading
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Scaling: I will not scale the exams, but will
scale final grade
Debate 2
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Group 1: Dikesha Patel, Dionne Wisdom,
Jason Lai (FTC – merger challenger)
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Group 2: Devon Bell, Thomas Fantini,
Michael Murphy, Aline Desouza (defense
side)
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First video
Second Video
Room for defense (5 minutes, per group)
i>clicker questions throughout
Please put away your laptops
Controversy
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What was the most controversial issue in this
case?
A. Geographic market definition
B. Product Market definition
C. Calculation of cost efficiencies
and pass through rate
D. Determining entry barriers
Anticompetitive merger?
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Do you think the merger would have
significantly increased prices of office
supplies?
A. YES
B. NO
Clarity of Presentation
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Which side presented the clearest case?
A. FTC (merger challenger)
B. Staples – Office Depot
Strength of Arguments
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Which side presented the strongest economic
arguments?
A. FTC (merger challenger)
B. Staples – Office Depot
Overall assessment of quality of
presentation
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On a scale from 1 – 10 (1 poor, 10
outstanding), what would be your rating of
the FTC’s side?
Overall assessment of quality of
presentation
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On a scale from 1-10 (1 poor, 10
outstanding), what would be your rating of the
defense side (Staples – Office Depot)?
Anticompetitive merger?
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Do you think the merger would have
significantly increased prices of office
supplies?
1. YES
2. NO
Staples – Office Depot
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Recall merger guidelines is a two-step process:
1.
Market definition
2.
Would competition be harmed?
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Concentration (HHI)
Increased prices (unilateral)
Entry barriers
Cost efficiencies
Market Definition
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Key issue: Market Definition
 FTC: Sales in OSS
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Different shopping experience
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Mutual recognition
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Internal documents
No close substitutes
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One stop shop
Different prices
Non-OSS can’t discipline OSS
This definition gave 75% of market to
merged firm
Market Definition
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Staples – Office Depot
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Superstores, supermarkets, discount stores, online, OSS, etc.
Market definition should look at product not seller
Costco and Wal-mart can easily expand shelf
space to compete
With this definition: 5% - 6% combined market
share
Unique about this case:
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Inspection of store was critical for judge
Identity of seller was used to define market
Likely Anticompetitive Effects
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Econometric and statistical evidence:
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Compare prices going from 2 to 1 and from 3 to 2
competitors
Office
Depot effect
Staples
effect
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Defendants showed statistical evidence on how
prices went down with entry of Wal-mart, Best Buy
Likely Anticompetitive Effects
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Econometric and statistical evidence:
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What does competition look like in the future?
3 to 2 competitors is more important
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Staples-OD : these are not reliable
comparisons as 1 and 2 firm markets are
different than 3-firm markets
Likely Anticompetitive Effects
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Econometric and statistical evidence:
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Stock event study: how did Office Max stock price
change after announcement?
If merger is expected to increase price, then
competitors also benefit with a price increase
If competitors benefit from a price increase, stock
should go up
Statistical evidence supported increase in Office
Max stock price as likelihood of merger was higher
Likely Anticompetitive Effects
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Efficiencies
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Defendants: less advertising, procurement
costs (economies of scale)
FTC: costs will go down but:
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Are they merger specific?
Economies of scale are nearly exhausted
Even if costs go down, will prices?
Cost reduction pass-through appears low: 0.15%
Judge:
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Estimates by defendants unreliable
Cost efficiencies are (historically) difficult to
successfully use in court
Likely Anticompetitive Effects
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Entry
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FTC:
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There are notable entry barriers:
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Economies of Scale
Economies of Advertising
Customer Loyalty
“Saturated” Markets (Insufficient Demand)
Staples – Office Depot
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Some recent thoughts:
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Increasing importance of internet sales (many office
supplies are no longer purchased at brick and
mortar stores).
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Business model: back to small-size stores?
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Best Buy, Staples, and even Wal-Mart considering new
format
Back to old format?
Back to old format?