1. Public Policy in Private Markets Debate 2 Merger wrap up

2. Announcements Today:  Debate # 2  Pick up HW 3  Turn in HW 5 Debate 3: 4/12 (video due to me by 4/10)  HW 6, posted and due on 4/12 Midterm # 2: 4/19  Review: 4/18; 6-8 pm  More later

3. Midterm assessment Thanks for your participation! Things that seem to work  i>clicker  Cases  Options for grading  Fair grading (although stiff!)  Usefulness of PPT slides

4. Midterm assessment Things that need improvement  Midterm: unexpectedly hard, time issue This is a capstone course (expected) I failed in conveying the correct expectation Let me work on this:  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)

5. Midterm assessment Things that need improvement  Midterm/grading Scaling: I will not scale the exams, but will scale final grade

6. Debate 2 Group 1: Dikesha Patel, Dionne Wisdom, Jason Lai (FTC – merger challenger)  First video Group 2: Devon Bell, Thomas Fantini, Michael Murphy, Aline Desouza (defense side)  Second Video Room for defense (5 minutes, per group) i>clicker questions throughout Please put away your laptops

7. Controversy 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

8. Anticompetitive merger? Do you think the merger would have significantly increased prices of office supplies? A.YES B.NO

9. Clarity of Presentation Which side presented the clearest case? A.FTC (merger challenger) B.Staples – Office Depot

10. Strength of Arguments Which side presented the strongest economic arguments? A.FTC (merger challenger) B.Staples – Office Depot

11. Overall assessment of quality of presentation On a scale from 1 – 10 (1 poor, 10 outstanding), what would be your rating of the FTC’s side?

12. Overall assessment of quality of presentation On a scale from 1-10 (1 poor, 10 outstanding), what would be your rating of the defense side (Staples – Office Depot)?

13. Anticompetitive merger? Do you think the merger would have significantly increased prices of office supplies? 1.YES 2.NO

14. Staples – Office Depot Recall merger guidelines is a two-step process: 1. Market definition 2. Would competition be harmed? Concentration (HHI) Increased prices (unilateral) Entry barriers Cost efficiencies

15. Market Definition Key issue: Market Definition  FTC: Sales in OSS Different shopping experience  One stop shop  Different prices Mutual recognition  Internal documents No close substitutes  Non-OSS can’t discipline OSS This definition gave 75% of market to merged firm

16. Market Definition  Staples – Office Depot Superstores, supermarkets, discount stores, on- line, 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: Inspection of store was critical for judge Identity of seller was used to define market

17. Likely Anticompetitive Effects Econometric and statistical evidence:  Compare prices going from 2 to 1 and from 3 to 2 competitors  Defendants showed statistical evidence on how prices went down with entry of Wal-mart, Best Buy Office Depot effect Staples effect

18. Likely Anticompetitive Effects Econometric and statistical evidence:  What does competition look like in the future? Staples-OD : these are not reliable comparisons as 1 and 2 firm markets are different than 3-firm markets 3 to 2 competitors is more important

19. Likely Anticompetitive Effects Econometric and statistical evidence:  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

20. Likely Anticompetitive Effects Efficiencies  Defendants: less advertising, procurement costs (economies of scale)  FTC: costs will go down but: 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: Estimates by defendants unreliable Cost efficiencies are (historically) difficult to successfully use in court

21. Likely Anticompetitive Effects Entry  FTC: There are notable entry barriers:  Economies of Scale  Economies of Advertising  Customer Loyalty  “Saturated” Markets (Insufficient Demand)

22. Staples – Office Depot Some recent thoughts: Increasing importance of internet sales (many office supplies are no longer purchased at brick and mortar stores). Business model: back to small-size stores? Best Buy, Staples, and even Wal-Mart considering new format

23. Back to old format?