of the Secretary



February 27, 2003


The Honorable Anibal Acevedo-Vilá
P.O. Box 9023958
San Juan, PR 00902-3958


Wal-Mart Stores, Inc. and Supermercados Amigo, Inc.,
File No. 021 0090, Docket No. C-4066

Dear Representative Acevedo-Vilá:

Thank you for your comment regarding the Federal Trade Commission's proposed consent agreement relating to the acquisition of Supermercados Amigo, Inc. ("Amigo") by Wal-Mart Stores, Inc. ("Wal-Mart"). The Federal Trade Commission ("Commission") has concluded that there is reason to believe that Wal-Mart's acquisition of Amigo would violate Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act. The agreement requires Wal-Mart's divestiture of all of the acquired Amigo stores in three geographic markets, the areas of Puerto Rico in and near Cayey and Cidra (the "Cayey" market), Ponce and Juana Diaz (the "Ponce" market), and Barceloneta, Manati, and Vega Baja (the "Manati" market), to Supermercados Maximo, Inc. The Commission believes that the required divestiture eliminates the anticompetitive effects that otherwise would have resulted from the acquisition.

In your comment, you express concern that the required divestiture would not prevent Wal-Mart's post-acquisition exercise of market power (unilaterally or in coordination with others), and, by way of explanation, you provided a copy of a joint report of the Puerto Rico Senate and House of Representatives ("Joint Report"), which addresses the hypothetical impact of the Wal-Mart/Amigo acquisition on Puerto Rico workers and on the Puerto Rico economy. The Joint Report addresses two types of issues. First, it discusses general social issues, such as the effect of Wal-Mart's expansion on labor and employment in Puerto Rico, and the merger's potential impact on the viability of small- and medium-sized business and urban sprawl. Second, the Joint Report raises antitrust problems it fears may result from the merger, such as predatory pricing and monopsonization. We are placing our responses to your comment, as well as to all other public comments, on our website to provide further insight into our investigative process.

Labor, Employment, and Social Welfare/Planning Issues

The Joint Report opines that Wal-Mart's acquisition of Amigo ultimately would result in a loss of supermarket-related jobs, reduced job security and worker benefits, and increased employment discrimination, worker exploitation, and anti-labor union activity. These concerns involve significant questions of social welfare and labor policy. However, they are not the focus of an antitrust analysis. Likewise, the Joint Report also expresses concern that Wal-Mart's acquisition of Amigo ultimately would lead to reduced sales of Puerto Rico agricultural products, speed the displacement of small- and medium-sized businesses such as neighborhood groceries and pharmacies, and accelerate urban sprawl and the hollowing-out of urban centers. While the Commission recognizes that these concerns reflect important questions affecting local economic development, they are also not concerns on which antitrust policy is focused. The Commission has neither the competence nor the jurisdiction to evaluate matters of these kinds.

The goal of antitrust law enforcement--a job that has specifically been entrusted to us--is to protect the competitive process, not shield competitors or preserve particular market structures or arrangements. Competition, though often turbulent, spurs innovation, productivity, and the enhancement of consumer welfare. In conducting its analysis of mergers, the Commission is guided by antitrust principles: specifically, under the Merger Guidelines, whether a merger is likely to create or enhance market power, or facilitate its exercise.(1) Accordingly, while the Joint Report raises several important social issues, those issues are not relevant to the analysis of the merger under the Commission's antitrust mandate.

Antitrust Issues

In the Wal-Mart/Amigo investigation, Commission staff sought and considered information about the likely competitive effect of the proposed acquisition from numerous sources, including retailers and distributors of supermarket items. The information provided by these sources often was valuable; for example, such information played an important role in the Commission's conclusion that in Puerto Rico the relevant product market includes club stores in addition to supermarkets.(2) In considering the submissions of incumbent firms, however, the Commission is careful to recognize that their interests do not necessarily correspond to those of consumers. Such firms often ignore or understate their ability to respond to competition, and treat pro-competitive efficiencies as threats.

For example, the Joint Report contains speculation that Wal-Mart's acquisition of Amigo will impair the viability of Puerto Rico suppliers and distributors. In fact, it appears that much of this speculation is really a complaint that the acquisition will increase the efficiency of Wal-Mart/Amigo's supply and distribution. To the extent that such a complaint is true--that is, that as a result of the acquisition, the combined Wal-Mart/Amigo lowers costs by employing a more efficient distribution system or purchasing products at a lower price--the acquisition will provide incentives to other suppliers and distributors to adapt and to become more efficient, and also to Wal-Mart/Amigo's rivals to seek new purchasing efficiencies in the wake of the merger. Whether in production, distribution, or retail sale, competition-mandated adaptations can be expected to ensure that efficiencies are realized and flow to consumers.

Adequacy of Divestiture

Your letter also raises the issue of whether divestitures should have been made in additional markets. As it does in every investigation, the Commission considered market definition on an intensely factual, case-by-case basis, using its long-established approach and methodology for market definition in the context of supermarket mergers. The Commission staff defined relevant antitrust markets in which to assess the proposed acquisition only after a careful examination of business operations, consumer purchasing patterns, and other circumstances applicable to Puerto Rico. Unlike commentators who had to speculate on market definition, concentration, and other issues, the Commission compelled the parties to the acquisition and others to produce (on a confidential basis) commercially sensitive information to make its assessment of the proposed merger. Based on this and other information, the Commission has determined that the effect of the Wal-Mart/Amigo acquisition, if consummated, may be substantially to lessen competition in three geographic markets (Cayey, Ponce, and Manati) and not in other areas. In each of the markets in which the acquisition would threaten competition, the Commission's consent order requires the divestiture of all of the acquired stores. Further, based on the information available to it, the Commission concluded that divesting additional stores was not necessary to ensure Maximo's competitive viability. Under these facts, requiring additional divestitures in markets not threatened by anticompetitive effects would be an improper exercise of the Commission's authority, and could deprive consumers of substantial benefits.

You specifically request that the Commission require divestitures in Cayey and Bayamon. As stated above, the Commission believes it is alleviating any potentially anticompetitive effects in the "Cayey" market by requiring the divestiture of the only Amigo store in that market, which is located in the nearby town of Cidra. Bayamon, on the other hand, is part of the San Juan metropolitan area. The Commission found that Bayamon did not constitute a relevant antitrust market and that the merger would not significantly lessen competition in the smallest possible relevant geographic market that includes Bayamon because there would continue to be extensive competition post-acquisition. Moreover, in addition to the high number of competitors already present, the area is subject to substantial additional entry and expansion by competitors other than Wal-Mart and Amigo. As a result, there is no basis for concluding that the Wal-Mart/Amigo transaction would be likely to cause anticompetitive problems in either the city of Bayamon or any part of the San Juan metropolitan area.

Predatory Pricing and Monopsonization

The Joint Report expresses a concern that the acquisition would increase the likelihood that Wal-Mart would engage in acts of predatory pricing. This concern appears to be based on Wal-Mart's reputation as a low-cost purchaser and seller of goods. However, consumers obtain immediate and substantial benefits from aggressive competition by low-cost purchasers and sellers. Moreover, the United States Supreme Court has noted that the conditions for successful predatory pricing are rare. See, e.g., Matsushita Electric Industrial Co. v. Zenith Radio, 475 U.S. 590 (1986). An acquisition, particularly one that has the potential to increase competition and reduce prices, should not be condemned based on speculation that an aggressive competitor may adopt a strategy of price predation (as opposed to competing aggressively on price).(3)

You also expressed concern that the merger could provide Wal-Mart with monopsony power. The Commission and its staff analyze the impact of acquisitions on potential creation or abuse of monopsony power in appropriate cases. Based on the evidence developed in our investigation, we did not find a credible threat that the acquisition of Amigo by Wal-Mart would increase the risk of monopsony power, and as a result, we did not include a discussion of monopsonization in our Analysis. However, given the concern expressed in your letter and the Joint Report, we below explain why, based on the available evidence (that we can publicly disclose), the acquisition does not threaten to create, enhance, or facilitate the exercise of monopsony power in a relevant antitrust market.

Monopsony power is market power of a buyer that, unlike the competitive buyer, can profitably reduce the purchase price below competitive levels by scaling back purchases in a relevant antitrust market. The exercise of monopsony power causes competitive harm because the monopsonist will either shift some of its purchases to a less efficient source or produce too little output to the downstream market (or both). A shift in purchases from an existing source to a lower cost, more efficient source is not an exercise of monopsony power.

The Joint Report apparently raises its concern about possible monopsonization based (a) on the threatened shift of control of Amigo's purchasing to an owner that may purchase from different suppliers or "drive a harder bargain" than Amigo or (b) on the increased concentration of purchasing resulting from the combination of Wal-Mart and Amigo. However, for at least two reasons there is no credible threat that Wal-Mart's acquisition of Amigo would create or enhance the potential for the exercise of monopsony power. First, if Wal-Mart/Amigo shifts its purchases to lower-cost suppliers, Puerto Rico distributors' or suppliers' sales to Wal-Mart/Amigo may be reduced, but this would reflect competition, not monopsony. Second, there are numerous other purchasers (actual and potential) of Puerto Rico products--both in and beyond a "supermarket" product market(4) and in and beyond Puerto Rico--to which Puerto Rico distributors or suppliers could turn if Wal-Mart/Amigo attempted to exercise monopsony power. In other words, the market for sales of Puerto Rico products is not highly concentrated, and the Wal-Mart/Amigo transaction does not significantly increase concentration in any such market, nor endow the merged firm with monopsony power. Thus, the fundamental condition for any viable monopsony theory is not present.


While we have attempted to address your concerns in this response, we observe that Commission Rule 2.34(c), 16 C.F.R. § 2.34(c), provides that, when the Commission publishes a proposed consent agreement for public comment, it will provide "an explanation of the provisions of the order and the relief to be obtained thereby and any other information that it believes may help interested persons understand the order." The Analysis of the Complaint and Proposed Decision and Order to Aid Public Comment ("Analysis") in this matter satisfied these requirements. It explained the order provisions and the relief to be obtained and it published all other information that the Commission believed would help interested persons understand the order. The rule does not require that the Commission publish a synopsis of its investigation or a discussion of any or all approaches that were considered and rejected during the investigation.

The public comment period is for the Commission's benefit. The primary purpose of the public comment period and of the Analysis is to invite the submission of comments that will assist the Commission in assessing the proposed consent agreement. The question, therefore, is whether the Commission has enough information to make a correct decision. The information available to the Commission includes not only the public comments but also, of course, the factual information and analyses developed by the staff during the course of the investigation. The Commission is satisfied that the information received in response to the invitation for public comment, together with all of the other information available to the Commission, is adequate for it to evaluate the proposed agreement.

We appreciate your concerns and the time you took to comment in this matter. After careful consideration of your comment and other materials, the Commission has determined to accord final approval to the consent order in this matter, without modification. Please let us know whenever we can be of assistance.

By direction of the Commission, Commissioner Anthony recused.

Donald S. Clark

1. See generally Thomas B. Leary, The Essential Stability of Merger Policy in the United States, 70 Antitrust L.J. 105, 109-10 (2002);United States Dep't of Justice & Federal Trade Commission, Horizontal Merger Guidelines (1992), as revised (1997), at § 0.1. "Market power" is typically defined as the ability of a seller to profitably maintain prices over competitive levels for a significant period of time, or as the corresponding ability of a buyer to profitably maintain prices below competitive levels for a significant period of time. Id. Thus, merger analysis typically focuses on the likely effect of a merger on prices and output, though quality and other non-price components of competition are also significant.

2. This conclusion led to increased scrutiny of the transaction because it resulted in a higher number of overlap areas.

3. By a price predation strategy, we mean a strategy in which a competitor prices below cost to drive rivals from the market, and is then able to raise prices sufficiently to offset the losses sustained earlier when selling below cost.

4. The use of the word "supermarket" in this case includes club stores. .