Different facts, different outcome

Remember 1997?  Cellphones had antennas and DVDs were the next new thing. Maybe you “surfed the Web,” but more likely not: only 18 percent of U.S. households had a computer connected to the Internet, according to the Census Bureau.

In competition news, the FTC won an important victory by blocking the merger of Staples and Office Depot, the top two office supply superstore chains in the United States. The case is remembered mainly for its extensive use of data showing that (1) prices of office supplies were substantially higher in cities with two office supply superstore chains than cities where the three major superstore chains competed, and (2) prices were the highest in markets with only one superstore chain. These price differences persisted even when customers in the market had other sources of office supplies such as mail order, price clubs, large wholesalers, and independent stationers. With this and other evidence, the federal district court concluded that the sale of consumable office supplies through office supply superstores was a relevant market.

Fast-forward to 2013. Phones are now “smart,” and consumers are more likely to stream movies than watch a DVD. Worldwide, over 2.4 billion people use the Internet, and U.S. retailers sell over $200 billion in goods and services online every year.

In November, the FTC voted unanimously to close its investigation of the merger between Office Depot and Office Max, noting significant changes in the market for the sale of consumable office supplies. For instance, customers now routinely buy office supplies from other types of brick-and-mortar retailers: mass merchants like Target, or club stores like Costco. According to the Commission, the “explosive growth of online commerce” has had a major impact as well.

What’s the evidence office supply superstores face competition from other retailers today?

  • Consumers now favor the convenience of buying office supplies at stores that sell other products.
  • Office Depot and Office Max engage in national pricing for the majority of their office supply products rather than local pricing that varies based on the number of office supply superstores in the area.
  • Documents from office supply superstores discussing the growing threat of other types of competitors such as club stores, mass merchants, and online retailers, as well as pricing adjustments to counter those threats.
  • Office Depot and Office Max sales losses to competitors other than other office supply superstores.

Then there’s the data. Commission staff not only conducted the same type of econometric work performed in the Staples case, but also conducted a host of additional analyses to gauge the likely effect of the proposed merger on prices. Based on all the facts, the Commission concluded that today, office supply superstores face significant competition from other types of retailers—from online retailers like Amazon, but also from other brick-and-mortar retailers like Walmart. As a result, the Commission concluded that the merger of two office supply superstores was unlikely to lead to anticompetitive price increases.

Does this mean that all cases involving local markets will now include online sellers? No, because antitrust analysis is fact-specific. If brick-and-mortar stores can successfully raise prices and make more money even if they lose some in-store sales to online buying,* then the relevant market would not include online sellers. On the other hand, if the stores were forced to bring prices back down—or didn’t raise prices at all knowing that they would lose money because customers would simply buy from online retailers—then online sellers may represent the kind of competitive constraint that benefits consumers and prevents an exercise of market power. (In Horizontal Merger Guidelines parlance: Could a hypothetical profit-maximizing monopolist of all brick-and-mortar stores in a local area profitably impose a small but significant and non-transitory price increase?)

*Note that many brick-and-mortar stores sell the same products online; indeed, the Commission noted that the in-store and online channel boundaries are blurring as stores try to create a seamless customer experience by offering in-store pickup for online orders and providing in-store Internet kiosks for shoppers to order products online. If these cross-channel retailers were able to maintain different prices online from those charged in stores (and that did not account for differences such as shipping costs), this evidence might support a conclusion that there are distinct markets for certain customers, perhaps a market limited to sales online or to sales in-store.

Markets can and do change, but the antitrust laws were built to last. So we’ll keep asking the same questions about the nature of competition and the likely effects of proposed mergers, and see where the facts take us. Sometimes the answers will lead the Commission to challenge a proposed merger, and sometimes they won’t.

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