Had anyone else not heard of the proposed merger between Office Depot and Staples that Jura mentioned in class? What happens when the government wants to prevent a merger? What sorts of evidence do they use? We decided to investigate the case.
The attempted acquisition of Office Depot by Staples, one of the office supply chain’s two leading rivals (the other being OfficeMax), is a prime example of modern anti-trust regulation in the U.S. Staples began preparing for the merge in early 1997 and was promptly sued by the Federal Trade Commission. The FTC sought an injunction in federal court barring the merge.
The government’s burden was to prove that the merger would be anti-competitive by analyzing firm behavior. Using Econometric analysis, the FTC demonstrated that prices for office supplies in Staples and Office Depot were lower in cities where the two competed head-to-head as opposed to those where only one of the stores had set up shop. To put this into terms we can relate to, look at one of the examples the FTC cited – file folders. In Orlando, where Office Depot competes with both Staples and OfficeMax, file folders cost $1.95. In Leesburg, Florida, a city some fifty miles away in which Office Depot is the only superstore, the same file folders will run you $4.17. Any this is according to Office Depot’s own ads!
The FTC argued that if the merger was permitted to go through, some forty markets across the country would be in Leesburg’s situation, containing only one of the three superstores. Notice how the FTC’s definition of the geographical market is critical – if Leesburg is lumped into Orlando’s market, the merger might go through. But as it stands defined, the FTC can show that the merger would tend to raise prices for consumers, and hurt their ultimate welfare. And a note to those of you considering going into business – don’t do what Office Depot did, which was to label its stores as located in “price zones” if they faced entry by other superstores, and “non-competitive” if they did not. Talk about the “smoking gun memo” for the FTC! In the face of such evidence, Staples’s argument that the newly merged company would face increased competition from non-office supply stores selling similar products (think Wal-Mart, Target) seemed to break down.
And so the proposed merger between Staples and Office Depot was rejected by a 4-1 decision of the federal court, and became one for the record books.
The FTC’s website, www.ftc.gov, is a great resource for more information on this attempted merger, especially the log of press releases and the testimonies of government officials.
Posted by Jung-In Choi, Katie Meyer, and Helen Mayer
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Staples' "Easy Button" Doesn't Work for Anti-Trust Laws
In its new advertising campaign, Staples boasts that its "Easy Button" makes everything simple. Yet the issues surrounding its fight with the Federal Trade Commission are anything but straightforward. “Office Depot? What’s That?” highlights several reasons why the Federal Trade Commission (FTC) waged anti-trust war against Office Depot and Staples’ merger plans. In its strongest argument against the merger, the FTC revealed that regions that are served by either Office Depot or Staples face higher prices than areas that are served by both stores. When you apply the Lerner Index to this finding, it seems that Office Depot hikes it prices up in areas where it has more market power. But, there is more than one way to explain this price discrepancy. To add some zest to this 1997 debate (which the FTC ultimately won) I urge you to explore why Donald J. Boudreaux says the case is a prime example of “economic incoherence.”
What if the higher prices in the “non-competitive” areas were a reaction to low demand, rather than a scheme to help corporate Dr. Evils seize market power? Boudreaux points out that “areas served by both Office Depot and Staples have higher population densities than do areas in which only one of these retailers is present. As with grocery sales, higher population densities mean greater sales revenue per square foot per day - which in turn means that, compared to firms in less-populated regions, firms in high-population regions can spread their fixed costs more widely. The result is lower prices.”
Let’s suppose, for a minute, that Office Depot and Staples did plan to take over the office-supply world, and that they started to charge outrageously high prices after they merged. Wouldn’t Wal-Mart, K-Mart, and Target stores jump on the opportunity to “roll back prices” on their staplers, paperclips, and Post-Its? It seems that there is more than one side to this story.
Sorry, Staples, there’s no “easy button” here.
Posted by: Caryl Huynh, Meghan Magennis, Chris Coyle, Lance Wang
I am glad this merger didn’t go through as it is an excellent example of what consumers miss out on when there is basically monopolist control over certain products. I was outraged to find that file folders cost more than $2 more in some areas than others; basic file folders seem like the type of product that would basically be sold almost at cost no matter where you go, so it was very surprising to see how much of an effect a monopoly would have in the real world. In addition, Staples/Office Depot must’ve been crazy to think that their defense of extra competition was going to hold up in light of this economic research. I highly doubt that if the merger went through, the new company would have any problem dominating the office supply market. Overall, I think the FTC made a great decision, and this will hopefully serve as an example to other companies.
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