Wednesday, August 26, 2015

The Proposed Merger of Staples and Office Depot: Lessons from History and New Competitive Concerns

Randy Stutz, American Antitrust Institute (AAI) explores The Proposed Merger of Staples and Office Depot: Lessons from History and New Competitive Concerns.

ABSTRACT: The proposed combination of Staples and Office Depot presents the Federal Trade Commission (FTC) with a host of merger review challenges. The transaction follows closely on the heels of the Office Depot/OfficeMax merger in 2013 and would complete a rapid 3-1 consolidation of the office supply superstore (OSS) market. Both retail and business-to-business customers may be significantly affected by the proposed transaction. The deal puts front and center the question whether evolving alternative business models for the sale of consumable office supplies are a viable substitute for OSSs. It also raises issues that the Commission recently addressed in the successfully enjoined merger of national broadline food service distributors Sysco and U.S. Foods - namely that a merger of the only two rivals in a national market may have adverse unilateral effects in a targeted customer market.

The American Antitrust Institute (AAI) is concerned that the proposed transaction may substantially lessen competition in the market for the sale of consumable office supplies to large multi-regional or national customers on a contract basis (hereinafter “enterprise customer market” or “enterprise market”). In particular, we are concerned that the proposed transaction threatens substantial unilateral anticompetitive effects that alternative supply responses could not ameliorate, and that harm to customers in this market will be passed on to consumers. Some of these harms implicate unique dimensions of quality competition involving cyber security and supply chain stability. We also raise questions as to whether rapid 3-1 consolidation threatens to reverse recent positive competitive developments in the retail office supply market, as well as the competitive significance of merging the only “omnichannel” retailers principally devoted to office supplies.

The analysis in this white paper is based on our review of publicly available information and conversations with industry experts and analysts. Because we do not have access to confidential or proprietary information that the Commission collects in the course of its investigation, we draw no conclusions as to whether the merger violates Section 7 of the Clayton Act. However, our analysis makes clear that the proposed merger warrants very close scrutiny by the Commission.

Major themes that emerge from this analysis include: The Commission should determine whether there is a distinct relevant product market for the sale of consumable office supplies to large “enterprise” office supply customers on a contract basis, and if so, who participates in this market. This is consistent with the Commission’s successful approach to defining targeted customer markets in Sysco v. Fed. Trade Comm’n.

The enterprise contract market likely is a relevant antitrust market because enterprise customers have no viable substitutes for the product and service offerings provided by OSSs. The next largest rivals are distant to Staples and Office Depot and are unable to compete on the scale and scope of the merging parties. Moreover, the merging firms may be the only participants in this market, because potential supply-side responses likely would fail to defeat a post-merger price increase in the market.

The proposed transaction threatens substantial unilateral anticompetitive effects in the enterprise market, and possibly also in the broader market for all contract customers. Potential anticompetitive harm arises not only from the loss of ordinary head-to-head competition between the merging firms, which is substantial, but also from the loss of competition to provide superior cyber security to contract customers and by increased supply chain fragility resulting from elimination of any redundancy in the OSS channel. Potential anticompetitive effects are unlikely to be mitigated by repositioning or new entry.

In its 2013 review of the OfficeDepot/OfficeMax merger, the Commission likely did not go far enough in distinguishing among competitive dynamics within and across the retail distribution channels through which OSSs provide products to end consumers. Although competition in the pure online retail channel is likely disciplined by national competition from Amazon and others, there are competitive concerns in the traditional superstore channel and in the emergence of omnichannel stores that warrant careful attention.

https://lawprofessors.typepad.com/antitrustprof_blog/2015/08/the-proposed-merger-of-staples-and-office-depot-lessons-from-history-and-new-competitive-concerns.html

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