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The case of FTC vs Staples
The proposed merger between Staples, an office-supplies superstore chain, and its rival Office Depot provides an interesting illustration of the role and importance of market definition in merger policy. Much of the discussion surrounding the merger, which was announced in September 1996, revolved around the correct definition of the market in which Staples and Office Depot compete. According to Staples, office products are sold in a fragmented $185 billion market in which the merged firm would have a meagre 5-6% share. According to the Federal Trade Commission (FTC), which in March 1997 voted to block the deal, the merged group would dominate a much narrower "office-supply superstores" market, pushing up prices for consumers. In fact, under this market definition, the Staples + Office Depot share would be close to 70%.
In the past, antitrust authorities have placed a lot of weight on measures of concentration such as the Herfindahl-Hirshman Index (HHI) (cf Section 9.2). A market cornered by a single monopolist would have a HHI of 10,000; one that is equally shared by 50 firms would have an HHI of 200. Typically, the FTC considers an individual market to be highly concentrated if its HHI exceeds about 1,800. Clearly, such threshold would be crossed under the restrictive market definition but not under the one proposed by Staples and Office Depot.
What is special about the Staples - Office Depot case is that, for the first time, the FTC has put relatively less weight on measures of market concentration and more on the estimation of the direct impact of the merger on prices. A study commissioned by the FTC showed that in cities where Staples and Office Depot compete, prices are lower than where they do not. Prices are even lower in cities where, in addition to Staples and Office Depot, Office Max (the third U.S. chain) is also present.
Based on this estimate, and notwithstanding Staples and Office Depot's offer to sell some of their stores to rival Office Max, the FTC stood by its decision to block the merger. In June 1997, Judge Hogan ruled in favor of the FTC.