Prices, Market Definition, and the Effects of Merger: Staples-Office Depot (1997)
The Antitrust Revolution: Economics, Competition, and Policy, 7th edn. Oxford University Press, New York (2018)
28 Pages Posted: 30 Mar 2019
Date Written: 2018
On September 4, 1996, the two largest office superstore chains in the United States, Office Depot and Staples, announced their agreement to merge. Seven months later, the Federal Trade Commission voted 4 to 1 to oppose the merger on the grounds that it was likely to harm competition and lead to higher prices in “the market for the sale of consumable office supplies sold through office superstores.” The merging parties chose to contest the FTC’s actions in court. On June 30, 1997, after a seven-day trial, Judge Thomas F. Hogan of the U.S. District Court for the District of Columbia agreed with the FTC and granted a preliminary injunction, effectively dooming the merger.
Staples broke new ground in terms of both the economic theory and the type of evidence presented at trial in an antitrust case. The antitrust enforcement agencies had traditionally focused on the increased probability of collusion following a merger as the primary theoretical underpinning for merger policy. In contrast, Staples spotlighted the potential for a merger to have “unilateral effects,” a shift in focus first signaled by the 1992 revision of the Department of Justice and FTC Merger Guidelines. Focusing on the characteristics of individual suppliers, the FTC argued that Staples, Office Depot, and OfficeMax were sufficiently different from other suppliers of office products, and sufficiently close competitors to each other, that the “sale of office supplies through office superstores” could be defined as a market separate from the sale of office supplies in general. In another departure, for evidence of the likely anticompetitive effect of the merger, the FTC relied primarily on direct estimates of the merger’s effect on prices, rather than just predicting that an increase in seller concentration would cause significant (but vaguely specified) price increases. In addition to internal documents describing pricing policies and simple (but powerful) price comparisons between cities where Office Depot and Staples currently competed and those where they did not, the FTC’s evidence on price effects included a large-scale econometric model that predicted the effect of the merger on prices. It also included an “event study” that used stock market data to calculate both the effect of the merger on shareholders and the financial market’s implicit estimate of the effect of the merger on the prices charged by office superstores.
Keywords: horizontal merger, antitrust, price effect, unilateral effects, case study, retail business, office superstores, office supplies
JEL Classification: L41, L81
Suggested Citation: Suggested Citation