Commentary

Antitrust and the Staples-Office Depot Merger

By William A. Niskanen
This article originally appeared in Legal Times.

Last month, the Federal Trade Commission went before the U.S. District Court for the District of Columbia to seek a preliminary injunction against a merger of Staples and Office Depot, two of the current three office-supply superstore chains. Once again, the FTC is apparently trying to prove that it will let no good deed go unpunished.

A ruling against this merger would set a terrible precedent. For markets in new technology or new services to develop fully, the government must allow so-called contestable monopolies. A company offering a new product or service should never be penalized on the theory that it may cause a monopoly, as long as there are no barriers to a competitor entering the market.

No business has a monopoly on the sale of office supplies. In 1986, Staples and Office Depot opened the first office-supply superstores—a major innovation in what had been a low-volume, high-margin retail market. In the decade since, these two companies have each opened about 500 superstores in the United States, substantially reducing the price of office supplies—especially for small businesses and home offices.

On Sept. 4, 1996, Staples and Office Depot announced their plan to merge, and said that the merger would generate economies of scale and further reductions in the price of office supplies. The immediate evaluation by the stock market seemed to confirm this claim: The stock of Office Max, the third office-supply superstore chain, fell 4.5 percent that day.

The FTC, nevertheless, started an investigation of the proposed merger. Over the next six months, the commission developed two types of analysis that led it to conclude that the merger would probably increase paces.

First, several studies (including one by the Naderite group Consumer Project on Technology) found that the prices of select office supplies were lower in markets served by two or three of the superstores than in markets served by only one.

There are two serious problems with this type of evidence: (1) These studies did not control for other conditions affecting prices, like the size of the regional market or the presence of other discount retailers that sell office supplies. (2) The price comparisons were a snapshot of price differences at one point in time. They do not constitute sufficient evidence that the price differences were sustained over time—an unlikely outcome in a market with no unusual barriers to entry.

Second, the FTC changed the definition of the relevant market from the total market for office supplies to the market served only by the office-supply superstores. Staples and Office Depot together sell about 75 percent of office supplies sold by superstores, but only about 5 percent of total office supplies.

The FTC’s restricted definition of the relevant market ignores reality by assuming that the office-supply superstores face no effective competition from the many other types of stores and mail order retailers selling office supplies. In fact, Wal-Mart alone has about the same revenue from office supplies as would the proposed merger.

Staples and Office Depot grew and prospered by selling to price-sensitive customers. It is absurd to assume that these same customers would ignore the opportunity to purchase office supplies from outlets other than the superstores. The FTC has been spooked by a monster of its own creation.

Unfortunately, on the basis of this analysis and with prodding from the Nader group, the FTC announced on March 10 that it would seek a preliminary injunction against the merger. The stock of Office Max increased 2 percent that day, again seeming to confirm that the proposed merger would have reduced the price of office supplies.

In a final effort to avoid delay of the merger, and based on a recommendation by the FTC staff, Staples and Office Depot agreed to sell 63 of their stores to Office Max (at a bargain price) to maintain two-superstore competition in markets that, after the merger, would otherwise have only one superstore. Clearly, if eventual divestiture would be a feasible remedy to a final ruling against the merger, a preliminary injunction now is wholly unnecessary. Both companies have also made a public commitment to reducing prices after the merger.

But all of this has been to no avail. The parties and the District Court have been burdened with an unnecessary hearing on the FTC’s petition for a preliminary injunction. Even if Staples and Office Depot win in the District Court, the commission will hold an extended administrative procedure on the merger that could easily last a year, and the issue will ultimately have to be resolved again in the courts.

Surely, there must be something more important for the FTC to do than punish the most aggressive price-cutters in the office-supply market. Or maybe not. In the latter case, Congress should ask why the FTC is doing the work of the Antitrust Division of the Justice Department. Do we really need two antitrust agencies?

William A. Niskanen is chairman of the Cato Institute, which receives no funds from any of the parties in this case. He is the former acting chairman of President Ronald Reagan’s Council of Economic Advisors.