Transcript Standard Setting in High

Class 16
Antitrust, Fall, 2015
Modern Horizontal Merger
Cases
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
773.702.0864/[email protected]
Copyright © 2000-15 Randal C. Picker. All Rights Reserved.
CA Sec. 7

No person
engaged
in commerce or in any activity affecting
commerce
 shall acquire, directly or indirectly, the whole or
any part of the stock or other share capital
July 17, 2015
2
CA Sec. 7

and no person
subject
to the jurisdiction of the Federal Trade
Commission
 shall acquire the whole or any part of the assets
of another person engaged also in commerce or
in any activity affecting commerce,
July 17, 2015
3
CA Sec. 7
where
in any line of commerce or in any activity
affecting commerce in any section of the country,
the effect of such acquisition may be substantially
to lessen competition, or to tend to create a
monopoly.
July 17, 2015
4
FTCA Sec. 13(b)
Upon
a proper showing that, weighing the equities
and considering the Commission’s likelihood of
ultimate success, such action would be in the
public interest, and after notice to the defendant, a
temporary restraining order or a preliminary
injunction may be granted without bond
July 17, 2015
5
Sept 4 1996: Staples wants to
buy Office Depot

3 Major Players in Office Superstores
Office
Depot: > 500 stores, 38 states and DC, with
emphasis in South and Midwest
Staples: > 550 stores, 28 states and DC, mainly
Northeast and California
OfficeMax: 575 stores, 48 states

Proposed purchase of OD by Staples
July 17, 2015
6
July 17, 2015
7
Staples AR 1996
July 17, 2015
8
Office Depot 10-K 1997
July 17, 2015
9
Office Depot 10-K 1997
Office Depot/Staples

FTC Action
Voted
to challenge
More negotiations and divestiture deal with sale of
63 stores to OfficeMax, again rejected by FTC in
3-2 vote
July 17, 2015
10
Possible Market Definitions

FTC 1
“The
sale of consumable office supplies through
office superstores”
 “Consumable” meaning products that
consumers buy recurrently, i.e., items which “get
used up” or discarded
July 17, 2015
11
Possible Market Definitions
• Yes: paper, pens, file folders, post-it notes,
computer disks, and toner cartridges
• No: computers, fax machines, and other
business machines or office furniture
July 17, 2015
12
Possible Market Definitions

FTC 2
“Sale
of consumable office supplies through retail
stores to small businesses and individuals with
home offices”

Defendant Market Definitions
Office
products (and would give combined market
share for OD/S of 5.5%)
July 17, 2015
13
Comparing the Stores

Functional characteristics
OSS:
20K to 30K sq. ft. w/anywhere from 5000 to
7500 SKUs devoted to consumables
Warehouse clubs: 100 to 289 SKUs consumables
K-Mart, Target: < 570 SKUs consumables
Wal-Mart: 1067 to 2400 SKUs consumables
July 17, 2015
14
Making the Office Supply
Superstore
Pen Store
Paper Store
Post-Its Store
$5 Paper
$5 Pens
$5 Post-Its
$2 T-Cost
$2 T-Cost
$2 T-Cost
If the OSS raises its prices 5%, what will happen?
Office Supply Superstore
Pens/Paper/Post-Its
July 17, 2015
$5.33Pens/$5.33 Paper/$5.33 Post-Its
$2 T-Cost
15
Answer

Customers Won’t Budge
Do
the Math
 $16 group price
 5% is another 80 cents
 Compare 18.80 = 16.80 + 2 vs. $21
For consumers who want all 3 products, OSS is
better deal
July 17, 2015
16
Try Again
Pen Store
Paper Store
Post-Its Store
$5 Paper
$5 Pens
$5 Post-Its
$2 T-Cost
$2 T-Cost
$2 T-Cost
If the OSS raises its prices 5%, what will happen?
Office Supply Superstore
Pens/Paper/Post-Its
July 17, 2015
$6.33Pens/$6.33 Paper/$6.33 Post-Its
$2 T-Cost
17
Answer

Customers Will Switch
Do
the Math
 $18.99 group price
 5% is another 95 cents
 Compare 21.94 = 19.94 + 2 vs. $21
For consumers who want all 3 products, separate
stores are a better deal
July 17, 2015
18
O Max O Depot Staples
N
Y
N
N
N
Y
N
N
N
N
Y
N
Y
Y
N
Y
N
N
Y
Y
Y
Y
Y
Y
July 17, 2015
Post-Merger
0 to 0: No change
1 to 1: No change
1 to 1: OD -> S, no change in
effective competition
1 to 1: No change
2 to 2: OD -> S, no change in
effective competition
2 to 2: No change
2 to 2 w/fix: Sell OD to OM, then no
change in effective competition
3 to 2: This is the box that matters19
Staples Competition Forecast

Overlap: 1995 Actual and 2000 Projected
Staples
Year
Only S & OD S & OM All 3 Total
July 17, 2015
1995
17%
29%
37%
17% 100%
2000
12%
7%
12%
69% 100%
20
Understanding Market 8: What
Happens to Prices?
I
OSS1
P/P/P
OSS2
P/P/P
OSS1
P/P/P
OSS2
P/P/P
III
July 17, 2015
II
OSS3
P/P/P
OSS1
P/P/P
OSS2
P/P/P
Paper Store
Pen Store
Post-Its Store
OSS1
P/P/P
OSS2
P/P/P
Paper Store
Pen Store
Post-Its Store
IV
OSS3
P/P/P
21
Merger Policy: Controlling
Incremental Market Power

What Merger Policy Can and Can’t Do
Merger
policy can’t do anything about whether we
are in Quadrant I or Quadrant II
Instead merger policy controls whether we are in
Quadrants (III or I) and (IV or II)
 If we are already in III or IV, allowing the merger
to go through will move us to I or II
July 17, 2015
22
Merger Policy: Controlling
Incremental Market Power
 Market
power will clearly increase as we move
from QIII to QI, but the question is by how
much? Does a single OSS effectively constrain
a second OSS?
 As to moving from QIV to QII, how much market
power increases depends on how effective the
non-OSS stores are as competitors
July 17, 2015
23
Actual Case Data

Direct economic evidence
Jan
1997 Data
 Staples prices are 13% higher in one OSS
markets than in 3-firm OSS markets
 ODs prices are 5% higher in one OSS markets
than in 3-firm OSS markets

Should we care about comparisons between 1
OSS markets and 3 OSS markets?
July 17, 2015
24
Slicing the Actual Data

Staples Prices 13% Higher in 1 OSS Mkt v. 3
OSS Mkt
Alt 1: Full Competition with 2nd Firm
 Move from 1  2: prices drop to 3 OSS level
 Move from 2  3, no change in prices
 “Full” competition as move from 1 to 2
 Moving from 3 to 2 unimportant
Extreme
July 17, 2015
25
Slicing the Actual Data

Staples Prices 13% Higher in 1 OSS Mkt v. 3
OSS Mkt
Extreme
Alt 2: 13% Higher in 2 OSS Mkt
 Move from 1  2: no change in prices
 Move from 2  3: prices drop to 3 OSS level
 No incremental competition until third OSS
shows up
July 17, 2015
26
Slicing the Actual Data

Staples Prices 13% Higher in 1 OSS Mkt v. 3
OSS Mkt
Extreme
Alt 2: 13% Higher in 2 OSS Mkt
 Moving from 3 to 2 a big deal as the 13% price
difference emerges only at that point

Reality?
These
July 17, 2015
data don’t tell us
27
Actual Case Data

Direct economic evidence
Staples
prices 1-2% higher in one OSS market
w/o warehouse club vs. those w/warehouse club

This is the OSS v. non-OSS data
July 17, 2015
28
Costs and Market Structure

Key Stat
Higher
prices in markets with just one OSS brand
present

Could higher prices by explained by higher
costs?
Advertising
costs shared by stores in area
Just one OSS brand present may mean fewer
stores overall and less sharing
July 17, 2015
29
How should we assess the
market?

Through the eyes of producers?
Documents
refer to office superstore industry,
define market shares based on that as the
denominator
Defendants establish price zones calibrated to
competition present; price differently when
competing office superstore is present
July 17, 2015
30
How should we assess the
market?

Through the eyes of customers?
Surveys
of customer behavior?
 As shopper exits office super store, ask “Do you
shop at Wal-Mart? Do you go there to buy
pencils?”
 As shopper exits Wal-Mart, do the same?
July 17, 2015
31
Court’s Bottom Line

Consumer Behavior
“Despite
the high degree of functional
interchangeability between consumable office
supplies sold by the office superstores and other
retailers of office supplies, the evidence presented
by the Commission shows that even where
Staples and Office Depot charge higher prices,
certain consumers do not go elsewhere for their
supplies.”
July 17, 2015
32
Court’s Bottom Line

Pricing Evidence
“The
pricing evidence indicates a low crosselasticity of demand between consumable office
products sold by Staples or Office Depot and
those same products sold by other sellers of office
supplies.
July 17, 2015
33
Court’s Bottom Line
This
same evidence indicates that non-superstore
sellers of office supplies are not able to effectively
constrain the superstores prices, because a
significant number of superstore customers do not
turn to a non-superstore alternative when faced
with higher prices in the one firm markets.”
July 17, 2015
34
How should we evaluate the
possibility of entry?

New Pure Entrants into OSS Market?
Decline
from 23 OSS chains to 3 in 11 years
Failure of Office 1
Failure of chains associated with existing retailers

Expansion of others? Wal-Mart? Best Buy?
Tried
July 17, 2015
and backed away
35
How should we evaluate the
claims of efficiency?

Assessing the numbers
Internal
inconsistencies: 500% difference between
FTC numbers and those presented to boards of
directors
Projected vendor cost savings: limited base,
casual extrapolation (omission of HP), and
questions of merger-specificity
July 17, 2015
36
How should we evaluate the
claims of efficiency?

Pass through rates
Projected pass through of benefits to consumers
of 2/3s vs. historic rates of 15-17%


Use of efficiencies as defense to concentration
problems uncertain under caselaw
July 17, 2015
37
July 17, 2015
38
FTC, Office Depot/OfficeMax, Nov. 1, 2013
July 17, 2015
39
OD/OM PR, Nov. 5, 2013
July 17, 2015
40
OD/OM PR, Nov. 5, 2013
July 17, 2015
41
OD/OM PR, Nov. 5, 2013
July 17, 2015
Office Depot Annual
42
Report 10-K 2012
July 17, 2015
Office Max Annual
43
Report 10-K 2012
1997
United
States
Walmart
Amazon
Office Depot
Office Max
Staples
July 17, 2015
2012
$ 8,316,300,000,000 $15,887,600,000,000
$ 104,859,000,000 $ 443,854,000,000
$
147,758,000 $
61,093,000,000
$
6,717,514,000 $
10,695,652,000
$
2,597,000,000 $
6,920,000,000
$
5,181,035,000 $
24,400,000,000
Ann
Growth
Rate
4.41
10.10
49.43
3.15
6.75
10.88
44
Selected Annualized Growth Rates 1997-2012
July 17, 2015
45
FTC, OD/OM, Nov. 1, 2013
Why would “consumers place a greater
premium on convenience” in 2013 than in 1997?
July 17, 2015
46
FTC, OD/OM, Nov. 1, 2013
July 17, 2015
47
FTC, OD/OM, Nov. 1, 2013
July 17, 2015
48
FTC, OD/OM, Nov. 1, 2013
July 17, 2015
49
FTC, OD/OM, Nov. 1, 2013
July 17, 2015
50
FTC, OD/OM, Nov. 1, 2013
July 17, 2015
51
Staples PR, Feb. 4, 2015
July 17, 2015
52
Staples PR, Feb. 4, 2015
July 17, 2015
53
Staples PR, Feb. 4, 2015
FTC v. Heinz

Transaction
merger of 2nd and 3rd firms in jarred
baby foods market
Proposed

Market Shares
Gerber:
65%
Heinz: 17.4%
Beech-Nut: 15.4%
July 17, 2015
54
FTC v. Heinz
Grocery Store
Gerber
Heinz
Beech Nut
NY, NJ, Calif, Fla
Pricing: Gerber – 1 cent
July 17, 2015
North NE, Southeast,
Deep South, Midwest
Pricing: Gerber – x cents
55
Key Market Characteristics

Market Overlap
Fn
3: Substantial market share separation
between Heinz and Beech-Nut

Retail Sector
Groceries
stock no more than 2 types of baby
food: Gerber and one other
Heinz and Beech-Nut pay slotting fees to grocers
to get on shelves
July 17, 2015
56
Key Market Characteristics

Production
Heinz
built new plant in Pittsburgh in 1991,
operates at 40% of capacity
July 17, 2015
57
How should we evaluate this
merger?


What role should the wholesale market play?
Does it matter how retail and wholesale
interact?
July 17, 2015
58
HHIs

Pre-Merger Market Shares
Gerber:

After Merger Market Shares
Gerber:

65%; Heinz: 17.4%; Beech-Nut: 15.4%
65%; Merged Entity: 32.8%
HHI
65
x 65 + 32.8 x 32.8 = 5300.28
Increase = 2 x 17.4 x 15.4 = 535.92
July 17, 2015
59
Evaluating Competition

HHIs?
Dead

on arrival
Have We Defined the Market Correctly?
Geographic
Separation?
 Gerber everywhere
 Heinz in some spots, Beach Nut in others
July 17, 2015
60
Understanding Pricing in this
Market



What is the pricing structure?
How are prices set?
What does this tell us about competition and
the possible consequences of the proposed
merger?
July 17, 2015
61
Pricing Structure and Price
Setting

Facts
Gerber
sets price; seen as premium brand
Beech-Nut sells for one cent less than Gerber;
marketed as premium brand
Heinz prices several cents below Gerber; sold as
value brand

What should we understand about competition
and the proposed merger?
July 17, 2015
62