Assignment:
Judge Hogan BACKGROUND
Staples is the second largest office superstore chain in the United States with approximately 550 retail stores located in 28 states and the District of Columbia, primarily in the Northeast and California. In 1996, Staples' revenues from those stores were approximately $4 billion through all operations. Office Depot, the largest office superstore chain, operates over 500 retail office supply superstores that are located in 38 states and the District of Columbia, primarily in the South and Midwest. Office Depot's 1996 sales were approximately $6.1 billion. OfficeMax, Inc., is the only other office supply superstore firm in the United States. On September 4, 1996, defendants Staples and Office Depot entered into an "Agreement and Plan of Merger" whereby . . . Office Depot would become a wholly owned subsidiary of Staples. The FTC filed this suit on April 9, 1997, seeking a temporary restraining order and preliminary injunction against the merger.
I. Discussion Analysis of the likely competitive effects of a merger requires determinations of (1) the "line of commerce" or product market in which to assess the transaction, (2) the "section of the country" or geographic market in which to assess the transaction, and (3) the transaction's probable effect on competition in the product and geographic markets.
II. The Geographic Market One of the few issues about which the parties to this case do not disagree is that metropolitan areas are the appropriate geographic markets for analyzing the competitive effects of the proposed merger. In its first amended complaint, the FTC identified 42 such metropolitan areas as well as future areas which could suffer anticompetitive effects from the proposed merger.
III. The Relevant Product Market
The Commission defines the relevant product market as "the sale of consumable office supplies through office superstores," with "consumable" meaning products that consumers buy recurrently, i.e., items which "get used up" or discarded. For example, under the Commission's definition, "consumable office supplies" would not include capital goods such as computers, fax machines, and other business machines or office furniture, but does include such products as paper, pens, file folders, self-stick notes, computer disks, and toner cartridges. The defendants characterize the FTC's product market definition as "contrived" with no basis in law or fact, and counter that the appropriate product market within which to AFTERWORD Citing the time and money involved in battling the federal government, Staples and Office Depot officially called off their proposed merger days after Judge Hogan's decision.
In 2013, 16 years after the rejection of the Staples and Office Depot merger, the Federal Trade Commission allowed after careful investigation the merger of Office Depot and Office Max (the nation's second- and third-largest office supply superstores). The FTC concluded that the competitive dynamics in the market had changed in those years. Online sales have seen explosive growth and the big box retailers (Walmart, Target, etc.) have significantly expanded their supply of office products, thus producing a broader product market than the configuration on which the Staples court settled. The two decisions show that a close look at the specifics of the market is required on a case-by-case basis.
Questions
1. a. What "general rule" did the Staples court employ in determining the relevant product market?
b. What evidence supported the use of the "office supply superstore submarket" as the relevant product market?
2. a. What evidence supported the FTC's claim that the merger would lead to anticompetitive effects?
b. In weighing the "public and private equities," why did the court come down on the side of the government?
3. Analysts have argued that in the Staples case the government was less worried about market shares than about the price impact of the merger were it to be approved. Explain what those analysts meant.
4. Three firms controlled the $1 billion U.S. baby food market (Gerber-65 percent, Heinz-17.4 percent, and Beech-Nut-15.4 percent). Gerber was sold in over 90 percent of American supermarkets, and it had greater brand loyalty than any other product sold in the United States. Heinz was sold in 40 percent of the supermarkets and Beech-Nut in 45 percent. The baby food HHI was 4775, which would increase by 510 HHI points if Heinz and Beech Nut were to merge. Heinz and Beech-Nut agreed to merge. The Federal Trade Commission opposed the merger.
a. What other facts would you want to know to decide the legality of this proposed merger?
b. Defend the merger.
c. Decide. Explain. See Federal Trade Commission v. H. J. Heinz Co. , 246 F.3d 708 (D.C. Cir. 2001).
5. In 1958, Pabst Brewing Company acquired Blatz Brewing Company. Pabst was America's 10th largest brewer, while Blatz was the 18th largest. After the merger, Pabst had 4.49 percent of the nationwide beer market and was the fifth-largest brewer. In the regional market of Wisconsin, Michigan, and Illinois, the merger gave Pabst 11.32 percent of the sales. After the merger, Pabst led beer sales in Wisconsin with 23.95 percent of that statewide market. The beer market was becoming increasingly concentrated, with the total number of brewers declining from 206 to 162 during the years 1957 to 1961. In United States v. Pabst Brewing Co. , 384 U.S. 546 (1966), the Supreme Court found the merger violated the Clayton Act, Section 7.
The Court did not choose among the three geographic market configurations, saying that the crucial inquiry is whether a merger may substantially lessen competition anywhere in the United States. Thus the Court held that, under these facts, a 4.49 percent share of the market was too large. Respected scholar and jurist Richard Posner labeled the Pabst decision an "atrocity" and the product of a "fit of nonsense" on the part of the Supreme Court. 32 What economic arguments would support Posner's colorful complaint?