1. Case 2: Staples-Office Depot Merger
Issues:
Product Market Definition
Unilateral vs. Coordinated Acts

2. Background Merger Announced: Sept. 4, 1996
Federal Court Decision: June 30, 1997
Staples
Invented “Office Superstore” 1986
550 Stores in 28 states
1996 revenues $4 b., stock value $3 b.
Office Depot
500 stores in 38 states
1996 revenues $6.1 b,; stock $2.2 b.
Office Max – Only other close rival
575 stores in 48 states
1996 revenues $3.2 billion

3. Market Definition Product Market Geographic Markets
FTC: Office supplies sold thru Office Superstores
Defendants: Broad market for retailing office supplies
Geographic Markets
Cities and/or metropolitan areas
The parties appear to have agreed on geographic markets

4. FTC’s Evidence: Product Market
Office Superstores offer distinct products and services
OSS stock up to 7500 items; others 500 (Kmart) to 2400 (Walmart) items
Parties’ internal documents considered OSS’s main competitors
Staples defined “competitive” and “non-competitive” markets on presence of other OSS’s
Non-OSS retailers have little effect on OSS prices in “competitive” markets
A survey for Detroit found that all OSS’s priced a basket of products within 2% of eachother, while Best Buy charged prices 18-19% higher
Non-competitive markets suffer Cellophane Fallacy: monopolists create competitors by pricing high

5. FTC’s Evidence: Product Market
Econometric Evidence
Large-scale econometric model
Explain Staples’ stores pricing as a function of nearby OSS’s as well as potential non-OSS rivals
Weekly prices for 18 months covering over 400 Staples stores in more than 40 cities
Model predicts merger to monopoly in areas where all 3 OSS’s compete raises OSS prices by 8.49% (> 5% test under Merger Guidelines)

6. Defendants Evidence: Product Market
Market defined by characteristics of product, not identity of seller
All office supply retailing regardless of store
Other internal documents used the term “market” to refer to non-OSS’s
Staples and Office depot regularly checked prices at Walmart, Best Buy, Comp USA and other non-OSS’s
Study shows a Staples store’s sales fall by 1.4% to 7.2% after opening of a non-OSS retailer

7. Concentration OSS market
Reduce 3 firms to 2 in 69% of geo mkts;
27 cities: combined S-OD share > 45%
Reduce 2 firms to 1 in 7% of geo mkts
Combined share 100% in 15 metro areas
Pre-merger HHI’s ranged from 3600 to 7000
Average change in HHI: 2715
All office supply retailing markets were unconcetrated

8. Entry Conditions OSS market All office supplies market: Easy entry
Economies of Scale in Advertising allow incumbents to “saturate” markets and deter entry
Company documents suggested that most major US markets were saturated: no room for new entrant at Minimum Efficient Scale (MES)
Sunk costs (advertising) and ability to change prices rapidly make “limit-pricing” strategies unlikely: potential entry does not constrain incumbent pricing
All office supplies market: Easy entry
Non-OSS’s can easily expand OS items
No sunk costs: nonperishable items, no fashion crazes
Expansion by Office Max shows OSS entry ease

9. Competitive Effects FTC Defendants
Prices increase 8.6% to 11.6% in S-OD only markets; 2.5% to 5.9% in 3-firm markets
S & OD management documents
Direct comparison of prices in local markets
Econometric Analysis
Prudential Securities pricing survey
Stock Market Event Study
Merger raises Office Max share price 12%
No effect on non-OSS retailers
Defendants
Prices increase 2.4% in S-OD markets; 0.8%-1.3% average over all Staples stores
Econometric Study

10. Efficiencies FTC Defendants
Scale efficiencies already realized w/o merger or would be soon thru growth
Parties efficiency estimates increased greatly after boards approved merger
Efficiencies too small to offset 7.3% average price increase
1.4% cost-saving x 0.15 pass thru = 0.2% reduction in price
Defendants
Efficiencies more than offset 0.8% price increase
4.5% cost saving x 0.67 pass thru = 3% price reduction

11. Equities
Defendants
Stopping merger will delay cost savings and benefits to consumers and stockholders of S & OD
Merger is reversible – no need for preliminary injunction

12. Court Decision: Grant FTC Request for P. I.
Product Market
OSS “submarket” within larger market of all office supply retailers
Competitive Effects
Merged firm “dominant” in many local markets
Prices likely higher due to OD’s elimination both as a direct and a potential competitor
Entry
Entry by new OSS extremely unlikely
Efficiencies
Not viable legal defense
Estimates unreliable & 0.67 pass-thru rate too high
Equities
“unscrambling the eggs” not realistic

13. Aftermath
Within 3 years both Staples and Office Depot achieved the size (1000 stores) they could achieve by merger
Many new stores in “overlap” markets
Most scale related efficiencies reached quickly
Without anticompetitive price effects