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Case 2: Staples-Office Depot Merger

Case 2: Staples-Office Depot Merger. Issues: Product Market Definition Unilateral vs. Coordinated Acts. Background. Merger Announced: Sept. 4, 1996 Federal Court Decision: June 30, 1997 Staples Invented “Office Superstore” 1986 550 Stores in 28 states

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Case 2: Staples-Office Depot Merger

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  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 • 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 • 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 • 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 • 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

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