Transcript Econometric Analysis of The Whole Foods/Wild Oats Transaction

Unilateral Effects Case Study:
The Whole Foods/Wild Oats Merger
Competition Commission of India
October 25-26, 2010
I. Introduction
Background to the Merger
• Whole Foods Market (WFM) and Wild Oats (WO) were national
supermarket chains selling organic and natural foods
Store Locations
NUGGET
Wild Oats
MINER
Whole Foods
• WO was in financial difficulty
• WFM sought to acquire WO
• FTC alleged that WFM and WO competed “head to head” in 21 geographic
markets and claimed that the merger would create a monopoly in
“premium natural and organic supermarkets” in nearly all of those
markets
NUGGET
MINER
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I. Introduction
Key Antitrust Issues
• Did WFM and WO constrain each others’ prices to such a degree that the
merged firm would be able to profitably raise prices without fear of
significant customer diversion to “conventional” supermarket chains?
• Central issues
– Product market definition / direct evidence of effects
- FTC alleged market was “premium natural and organic supermarkets”
- In a broader product market, WFM and WO had very small shares (usually <5%)
– Consumers’ willingness to switch to “conventional” supermarkets
- FTC contended there were many “core customers” who would not switch
- Parties contended that most consumers cross-shop and many would switch, and that price
discrimination against remaining “core customers” was infeasible
– Ease of repositioning, expansion and entry
- FTC argued supply responses would be unlikely, untimely and insufficient
- Parties pointed to many examples of repositioning and entry, and event study analysis
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II. Product Market Definition
FTC’s Argument and Analysis
• Product market is “premium natural and organic supermarkets” (PNOS)
– WFM, WO and a very few local niche competitors
• Qualitative evidence
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WFM and WO stores looked most alike among all competitive alternatives
WFM tended to located its stores in close proximity to WO
Internal documents reflecting historical rivalry
Testimony from WFM CEO downplayed competition from “conventional” chains
Testimony that merger would avoid “nasty price wars”
• Empirical evidence
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When a WFM store opened near a WO, it took substantial sales away from WO
Generally supported by WFM’s internal analyses
WFM margins generally higher than “conventional” supermarkets’ margins
WFM margins tended to be lower in markets with a WO store present
• FTC did not attempt formal SSNIP test, favoring Staples approach
primarily focused on margins analysis (and qualitative evidence)
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II. Product Market Definition
Parties’ Argument and Analysis
• Product market includes multiple other competitors — conventional
supermarkets, specialty food retailers, club stores, mass merchants
• Qualitative evidence
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Conventional chains carried many of the same products
Internal business documents recognize competition from non-PNOS supermarkets
WFM regularly price-checked conventional supermarkets
WFM tracked entry and store remodeling by conventional supermarkets
• Empirical evidence
– Price analyses showed uniform regional pricing by WFM and WO: prices did not
seem to vary based on WO’s presence or absence
– Event studies showed no evidence of significant price responses following WFM store
openings and WO store closings
• Parties contrasted absence of direct price effects evidence with Staples
case to argue market was much broader than PNOS
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II. Product Market – Direct Effects Evidence
Event Study Analysis
• Natural experiments
– Entries of WFM stores near existing WO stores and exits of WO stores near
existing WFM stores
– Opening a WFM store should have little effect on WO if WO’s pricing was
already constrained by conventional supermarkets and great effect if it was
not
– Closing a WO store should have had little effect on WFM if conventional
supermarkets constrained WFM’s pricing and great effect if they did not
• Compare average weekly prices paid by shoppers for thousands
of grocery items sold by WFM and WO before and after the entry
and exit events
– Compare item pricing at “treatment stores” (nearby to entries and exits)
versus “control stores” (in same region, but not close to entries and exits)
• Compare before vs. after prices on an item-by-item basis
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II. Product Market – Direct Effects Evidence
Price Change Comparison, Wild Oats Exits
Source: Whole Foods Market
http://www.wholefoodsmarket.com/ftchearingupdates/
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II. Product Market – Direct Effects Evidence
Price Change Comparison, Whole Foods Entry
Source: Whole Foods Market
http://www.wholefoodsmarket.com/ftchearingupdates/
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II. Product Market Definition
Discussion Issues
• How useful / informative is market definition in a highly
differentiated product merger?
• Should direct evidence of competitive effects be viewed as a
substitute or complement to formal market definition?
• What are the risks to defining the market unduly narrowly – e.g.,
PNOS rather than “all supermarkets”?
• How should quantitative evidence (data) vs. qualitative evidence
(documents, testimony) be weighed and reconciled when they
appear to be at tension?
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II. Product Market – Direct Effects Evidence
Further Readings
• Carlton Varner and Heather Cooper, “Product Markets in Merger
Cases: The Whole Foods Decision,” Antitrust Source October
2007 http://www.abanet.org/antitrust/at-source/07/10/Oct07Varner.pdf
• Jonathan B. Baker and David Reitman, “Research Topics in
Unilateral Effects Analysis,”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1504863
• FTC Unilateral Effects Analysis and Litigation Workshop,
February 12, 2008 transcript
http://www.ftc.gov/bc/unilateral/transcript.pdf
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III. Consumers’ Willingness to Switch
FTC’s Argument and Analysis
• WFM and WO marketed themselves to a core clientele
• “Core customers” would not switch to non-PNOS
competitors
– Products and services were highly differentiated
• Even if many consumers would switch, core customers
would be subject to price discrimination
– Higher prices?
– Reduced shopping convenience?
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III. Consumers’ Willingness to Switch
Parties’ Argument and Analysis
• Parties contended that consumers cross–shop widely
– WFM and WO documents
– Consumer survey findings
– Observations from the real world
• No identifiable mechanism to price discriminate against
“core” customers
– Conditions to support price discrimination were absent
• “Critical loss analysis”
– Calculate minimum loss of sales needed to make a post-merger
price increase unprofitable
– Qualitative evidence on whether “enough” consumers would switch
or divert their purchases to make the price increase unprofitable
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III. Consumers’ Willingness to Switch
Issues for Discussion
• Who defines the relevant market – the core customer or the
marginal customer?
– The marginal customer determines price, absent price
discrimination
– The marginal customer defines the boundaries of the market,
absent price discrimination
• What needs to be proven to support price discrimination
markets?
– Identify targeted buyers with inelastic demand
– Charge higher prices to targeted customers
– Prevent re-sale (arbitrage) from low-price to high-price buyers
– Prevent customer diversion to substitute products
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III. Consumers’ Willingness to Switch
Further Reading
• Sumanth Addanki and Alan J. Daskin, “Who Defines the
Relevant Market – The Core Customer or the Marginal One?,”
NERA Antitrust Insights, Summer 2008
http://lawprofessors.typepad.com/antitrustprof_blog/files/insights
_summer_2008.pdf
• Charles J. Biggio, “Whole Foods’ Impact on Unilateral Effects,”
Global Competition Policy, September 2008
http://www.wsgr.com/PDFSearch/wholefoods0908.pdf
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IV. Repositioning, Expansion and Entry
FTC’s Argument and Analysis
• Barriers to supply-side responses
– Reputational barriers
– Conventionals would need to “abandon” their own “core” customers
– WFM/WO “core” customers would not switch
• Likelihood, timeliness, sufficiency
– Unlikely – see above
– Not timely – reputational barriers?
– Insufficient – past examples were limited and did not elicit significant
responses from WFM or WO
• Elasticities should already reflect the effects of
repositioning on the likelihood of a unilateral post-merger
price increase
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IV. Repositioning, Expansion and Entry
Parties’ Argument and Analysis
• No barriers to supply-side responses
– Competitors had strong motive and means to enter/expand
– Uncommitted entry was feasible
• Multiple significant entries had taken place and were
ongoing
– Conventional stores’ private labels
– Stores within a store
– New store concepts and banners
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IV. Repositioning, Expansion and Entry
Empirical Analysis
• Direct effects evidence also can come from analyzing other
events – entries, expansions, repositioning by competitors
alleged to be outside of the product
• Supply-side responses by non-market participants should
not affect prices by firms within the alleged market
• Event studies
– Conventional entries and remodelings affected WFM and WO prices
―oftentimes by more than WFM entries and WO exits
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IV. Repositioning, Expansion and Entry
Issues for Discussion
• How high are the evidentiary hurdles to assess likely, timely
and sufficient supply responses?
• How probative are case examples of past entry?
• How should the possibility of post-merger repositioning by
the merging firms be factored into the unilateral effects
analysis?
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IV. Repositioning, Expansion and Entry
Further Reading
• Peter Boberg and John Woodbury, “Repositioning and the
Revision of the Horizontal Merger Guidelines,” Antitrust Source
December 2009 http://www.abanet.org/antitrust/atsource/09/12/Dec09-Boberg12-17f.pdf
• Amit Gandhi, Luke Froeb, Steven Tschantz and Gregory J.
Werden, “Post-Merger Product Repositioning,” Journal of
industrial Economics 2008
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V. Relevant Case Materials
Further Reading
• Complaint
http://www.ftc.gov/os/caselist/0710114/070605complaint.pdf
• FTC’s economic expert reports
http://www.ftc.gov/os/caselist/0710114/070823murphy.pdf
http://www.ftc.gov/os/caselist/0710114/070823rebutmurphy.pdf
http://www.ftc.gov/os/caselist/0710114/070823rebutmurphy.pdf
• District Court opinion
http://www.ftc.gov/os/caselist/0710114/0710114dcopinpub.pdf
• Court of Appeals opinion
http://www.ftc.gov/os/caselist/0710114/080729wholefoodsopinion.pdf
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