Case 2: Staples-Office Depot Merger

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
FTCs 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 OSSs main
  competitors
• Staples defined competitive and
  non-competitive markets on presence of other
  OSSs
• Non-OSS retailers have little effect on OSS
  prices in competitive markets
• A survey for Detroit found that all OSSs 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
FTCs Evidence Product Market

• Econometric Evidence
• Large-scale econometric model
• Explain Staples stores pricing as a function of
  nearby OSSs 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 OSSs compete raises OSS prices by 8.49 (gt
  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-OSSs
• Staples and Office depot regularly checked prices
  at Walmart, Best Buy, Comp USA and other
  non-OSSs
• Study shows a Staples stores 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 gt 45
• Reduce 2 firms to 1 in 7 of geo mkts
• Combined share 100 in 15 metro areas
• Pre-merger HHIs 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-OSSs 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 ODs 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