Yiyi Chen, Will Thompson, Caroline Fedora
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On September 4, 1996 Staples and Office
Depot, the two largest office supply stores
announced their agreement to merge
7 months later the FTC voted 4 to 1 to oppose
the merger because it would likely harm
competition and lead to higher prices in “the
market for the sale of consumable office
supplies sold through office superstores”
Staples and Office Depot chose to contest the
FTC’s actions in court
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After a 7 day trial, Judge Thomas F. Hogan of
the US District Court for the District of
Columbia agreed with the FTC and granted a
preliminary injunction, thus dooming the
merger
Antitrust enforcement agencies had
traditionally focused on the increased
probability of collusion following a merger, but
Staples highlighted the potential for mergers to
have “unilateral effects”
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The FTC argued that Staples and Office Depot
were sufficiently different from other suppliers
of office products, and sufficiently close
competitors to each other, that the “sale of
office supplies through office superstores”
could be defined as a market separate from the
sale of office supplies in general.
The FTC relied primarily on direct estimates of
the merger’s effect on prices, rather than just
predicting an increase in seller concentration
would cause significant price increases
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The FTC’s evidence on price effects included a
large-scale econometric model that predicted
the effect of the merger on prices
The FTC also used an “event study” that used
stock market data to calculate the effects of the
merger on shareholders and the financial
market’s implicit estimate of the effect of the
merger on the prices charged by office
superstores
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Staples became the first office superstore in 1986
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Within months, Office Depot launched their office superstore
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At the time of the merger Staples operated approximately
550 stores in 28 states generating $4 billion in revenue
Office Depot operated over 500 stores in 38 states generating
$6.1 billion in sales
The typical superstore is 23,000-30,000 square feet and
stocks 5,000-6,000 products
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About ½ of their revenue came from office supplies, and the
other half came from computers, office furniture, and other
business related items
Both chains purchased in bulk directly from the manufacturer,
which lead them to charge dramatically lower prices (30-70%
below the manufacturer’s suggested retail price)
Office superstores reached a peak of 23, but at the time of
the merger the only other remaining office superstore was
OfficeMax (a spinoff of K-Mart)
Office superstores drove thousands of independent stationers
out of business
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The competition between superstores greatly benefitted the
consumer because it led them to slash prices and expand
their offerings
Staples announces that it would acquire Office Depot by
exchanging 1.14 Staples shares for each outstanding Office
Depot share, an approximately $4 billion dollar deal. After a
7 month investigation, the FTC decided to challenge the
merger.
Concentration and the Competitive Effects of a Merger
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Merger policy states that mergers or acquisitions should not be
permitted to create, enhance, or facilitate the exercise of market
power, defined as the ability to profitably maintain prices above
competitive levels for a significant period of time.
Mergers can lead to higher prices in 2 ways: coordinated
interaction and unilateral effects
When only a few firms account for most of the sales of a certain
product, those firms can sometimes exercise market power by
either explicitly or implicitly coordinating their actions
Defining the Relevant Market:
“Consumable Office Supplies Sold Through
Office Superstores”
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The FTC supported this market definition by with four main
points.
1) OSSs offer a distinct set of products and services
• the FTC argued that OSS firms were different from other office supply vendors
because they carry a broad range of products and maintain a large amount of
stock on hand
• this one-stop-shopping opportunity was not provided by other retailers
• each visit to a store involves cash costs (price of goods) and noncash costs
(value of time required to visit the store, gather info on products, prices and
shop)
• since each visit to a store involves a fixed cost, consumers prefer to purchase
bundles of goods, especially low cost consumer goods
• OSSs devote significant shelf space to consumable office products and maintain
a large inventory to ensure the convenience of one-stop shopping
2) OSSs regard each other as their primary competitors
• In internal documents, Staples defined “competitive” and
“noncompetitive” markets based solely on the presence or
absence of other OSSs, and referred to its participation in an
“office superstore industry”
• Office Depot had similar internal documents
3) Non-OSS retailers do not tightly constrain OSS pricing
• “a monopolist is distinguished not by the fact that it faces no
competition, but by the fact that its closest competitors are too
distant to prevent it from maintaining its price at a level significantly
above cost.”
• While warehouse stores such as Wal-Mart may serve as competition
to Staples in geographic regions without other OSSs, such non-OSS
rivals are not significant competitors to staples in geographic
markets where Staples faces other OSS competitors, which is the
market that the FTC thought was relevant to the merger
• this was backed up with the econometric analysis
4) Econometric evidence supported an OSS product market
◦ The model measured how Staples’ prices differed among stores
depending upon the number of nearby OSSs
◦ The FTC’s analysis predicted that a merger to monopoly in markets
where all 3 OSS firms were present would raise the price of office
supplies sold in those markets by 8.49%
◦ This increase would not be possible if OSS firms were constrained by
other retailers
The Merger’s Anticompetitive Consequences
OSS concentration increase
Increase in market power
Large price increase
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Evidences:
 Structural Evidence
• increase in concentration and market power
• Leaving either two OSS firms or a monopoly
 Empirical Evidence
5 strong and direct evidences showing likely price
increases
1) Predictions of Staple’s Management
• Intense competition forces it to lower prices
• 40% of retail margins decline due to competition with
Office Depot in total decline
2) Local markets
• Price significantly lower when confronting each other
• Restraining effect
Average price differentials for office superstore products,
differing market structures
Benchmark OSS Market
Structure
Comparison
OSS Market Structure
Price
Reduction
Staples only
Staples + Office Depot
Staples +Office Max
Staples + OfficeMax + Office Depot
4.9%
Office Depot only
Office Depot + Staples
8.6%
Office Depot + OfficeMax Office Depot + Office Max +Staples
11.6%
2.5%
3) Econometric analysis
• Estimate how prices differed across markets depending on
the number and identity of firms
• Result: 7.3% overall price effects for the markets where the
merger partners were both present.
4) Prudential study
• Pricing survey comparing a three-player market and a
two-player market
• Result: price is 5.8% lower in three-player market
5) Stock-Market Event-Probability Study
 would raise value of OfficeMax’s share by 12%
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Entry Barriers
• New OSS supplier is not a threat
o High sunk cost and ability for incumbents to reduce
prices
o Conclusion: not affected by potential entry
• Significant barriers to entry
o Economies of scale in advertising
Staple’s strategy to deter entry: spread costs to total
number of stores
o Saturated market makes insufficient demand to new OSS
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Efficiencies Claims not sufficient
• Economics of scale
o Scale-related efficiencies could be attained through
internal growth
o Procurement cost reductions can be achieved by
expanding sales rather than expanding retail
o Staples and Office Depot already large enough
• No reliable evidence
• No likely price reduction
The merger would not have anticompetitive consequences
1) FTC’s market definition incorrect
▶ FTC’s claim based on identity of sellers
▶ Should be defined by characteristics of products/services
▶ OSS firms part of a broad market for selling office supplies in which
they held a low share
▶ Products sold by OSSs were not different than other retailers
▶ Retail format of OSSs was a good way of competing
▶ OSS pricing constrained by all office product retailers and OSSs
▶ Rejected claim that OSSs supplied a distinct bundle of goods that
would allow a monopoly OSS to raise OSS prices
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Also rejected use of internal documents for market definition
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Different meaning of the term “market” for an antitrust agency
and a company
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Other passages in same documents: “market” included non-OSSs
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Exhibits:
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Showed intense competition between OSSs and non-OSSs
• Regularly checked prices of non-OSS firms
• Study showing sales of a Staples store would decrease with
openings of new office supply retailers like Wal-Mart and Best Buy
2) Merger would not raise prices
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Efficiencies from merger:
• Increase total volume of products purchased and decrease prices
paid to manufacturers
• Lower administrative, marketing, advertising, distribution costs
• Pass on to consumer 2/3 of cost reductions, so would be able to
cut prices significantly
• Disagreed that much of efficiencies could be claimed absent of
merger
• Even if some from internal expansion, would be achieved faster
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Econometric study for efficiencies:
Office Depot had relatively small effect on Staples’ pricing
Absent efficiencies, merger would increase prices of consumable
office supplies at Staples stores by only:
0.8% when averaged over all products and all Staples stores
Efficiency gains alone would decrease prices by 3% over all
products and Staples stores
Net effect of merger: reduce prices by 2.2% for the average
Staples customer
(0.8%-3.0%)=-2.2% (FTC: 7.1% net increase)
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No barriers to entry
• Stores constructed within months
• Low sunk costs
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Ease of expansion by existing firms
• OfficeMax had increased planned new store openings in 1997
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Increasing shelf space allowed existing multiproduct retailers to
enter/expand into office product market with low costs
Losses from blocked merger:
• Consumers: efficiencies and lower prices
• Shareholders: any cost savings not passed on to consumers
• Merged OSS firm could expand faster than if separate
Final arguments:
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No need for preliminary injunction to stop merger
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Merger reversible if anticompetitive effects
Granted the preliminary injunction
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By law, FTC only had to show reasonable probability of harm to
competition
Reversing merger in future not a good option
Relevant product market: OSS firms only
• Sale of consumable office supplies by OSSs a submarket within a
larger market of office supply retailers
• Admitted goods sold by OSSs and non-OSSs seemed identical
• Small increase in prices of one OSS would not cause a large number
of customers to switch to a non-OSS retailer, but to another OSS
• OSSs very different from other retailers: format, number of items
• Internal documents: considered other OSSs as main competition
even though included non-OSSs
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Anticompetitive Effects:
• Merged OSS would have a dominant market share
• OSS likely to raise prices when less competition from other OSSs
• Without merger, entry into each other’s markets and reduce prices
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Entry:
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For new OSS to be profitable, need economies of scale
Need many new stores: high sunk costs
Not easy to achieve at local level: saturated by existing OSSs
Unlikely entry of new OSS or expansion of non-OSS could counteract
anticompetitive effects
Efficiencies:
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Not shown to be sufficient enough to counteract consequences
Unreliable estimates, not merger-specific
Unrealistic that 2/3 cost savings to go to consumers
Gains by consumers and shareholders not sufficient to counteract
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Within 3 years of abandonment, both firms achieved
size they would have if merger had been approved
As shown in pre-merger strategy documents, many of
new stores in overlap markets
Most efficiencies achieved quickly and without price
increases
Internet has allowed some entry and expansion
Since the case, antitrust agencies and merger applicants
have used direct evidence on the closeness of merging
competitors and the expected size of the price effects
to define the market and predict the effect of the
merger on consumer welfare