Officious Intermeddlers

Officious Intermeddlers

May 01, 1997

With its April 4 decision to block Staples' planned merger with Office Depot, the Federal Trade Commission (FTC) provided fresh evidence that antitrust is economically incoherent.

Initially, the FTC - allegedly fearing monopoly - promised to block the merger unless Staples sold dozens of its stores to rival OfficeMax at below-market prices. If Staples didn't agree to the prices offered by OfficeMax, a merger promising hundreds of millions of dollars in cost savings would be disallowed. Stretched over this barrel, Staples in March agreed to sell 63 of its stores to OfficeMax at roughly half of their market value.

But in the berserk world of antitrust, even this concession by Staples proved insufficient to appease FTC sages. After weeks of outcry from groups claiming the merger would harm consumers, the FTC rejected Staples' offer. If the merger is to ever occur, Staples must now defeat the FTC in what will likely be an expensive court battle.

Should consumers thank the FTC for blocking this merger? Hardly. FTC insistence that this merger between the nation's largest and second largest "office superstores" will raise consumer prices is untrue. Office-supply retailing is highly competitive. Of the $185 billion of office supplies sold annually in the U.S., the three office superstores (Office Depot, Staples, and OfficeMax) account for only seven percent of these sales. (This fact is no surprise; as recently as the mid-1980s there was no such thing as an "office superstore.") A combined Staples-Office Depot would account for a grand total of 5.4 percent of all office-supply retail sales. To allege that a firm with 5.4 percent of a market is a monopolist is to allege that our entire economy is overrun with monopolists.

The FTC responds by asserting the relevant market is not office-supply retailing in general, but "office superstores" only. Yet no group of retailers collectively making only seven percent of sales can legitimately be singled out as comprising a distinct market. Consumers wouldn't allow themselves to be gouged by "superstores" when these consumers can easily purchase the same products from an intensely competitive universe of office-supply retailers who account for more than $9 of every $10 of office-supply sales.

Office-supply retailers that aren't office superstores are not helpless mom and pops. Wal-Mart and K-Mart sell office supplies, as do some supermarkets. If retailers specializing in office supplies were to overcharge consumers, Wal-Mart and other non-specialist retailers would quickly expand their office-supply offerings. Can anyone doubt the incentive and ability of Wal-Mart or K-Mart to expand shelf space or even to open their own chains of office-supply stores?

In fact, even among existing office superstores, competition is already ensuring that a combined Staples/Office Depot gains no monopoly power. The Wall Street Journal reports that since the merger was announced, OfficeMax has "drastically accelerated its expansion plans." More stores means more competition. Competitive markets are working here in textbook fashion.

Another reason this merger poses no threat to consumers is that manufacturers of office supplies have powerful incentives to guard against retail monopoly. Monopolists raise prices. Higher prices reduce consumer demand. If the Staples-Office Depot merger reduced competition and sales volume, manufacturers distributing through these retail outlets would lose sales. To avoid this damage to their bottom lines, Microsoft, Hewlett-Packard, 3-M, Bic, and other savvy office-supply producers would offer discounts and other favorable deals to rival retailers in order to prevent a Staples-Office Depot monopoly.

The FTC bases its allegation of monopoly power on studies showing that office-supply prices are five to 15 percent lower in areas where there is both an Office Depot and a Staples, rather than just one or the other. From this fact, the FTC concludes that the merger will raise consumer prices.

But because office-supply superstores account for such a meager share of office-supply sales, it is unlikely that absence in a geographic region of one of these stores accounts for the observed pricing pattern. A more believable explanation for this finding is that areas served by both Office Depot and Staples have higher population densities than do areas in which only one of these retailers is present. As with grocery sales, higher population densities mean greater sales revenue per square foot per day - which in turn means that, compared to firms in less-populated regions, firms in high-population regions can spread their fixed costs more widely. The result is lower prices.

If pursuit of monopoly power doesn't explain Staples's interest in merging with Office Depot, what does? The answer: efficiency. By adopting many of the same mass marketing and distribution techniques pioneered by Wal-Mart and available only to high-volume retailers, office-supply retailing costs fall. And falling costs mean lower consumer prices. By preventing this merger, the FTC staples consumers to a wall of higher prices.