FTC Prevents Staples from Acquiring Office Depot

question 85

Essay

FTC Prevents Staples from Acquiring Office Depot

As the leading competitor in the office supplies superstore market, Staples’ proposed $3.3 billion acquisition of Office Depot received close scrutiny from the FTC immediately after its announcement in September 1996. The acquisition would create a huge company with annual sales of $10.7 billion. Following the acquisition, only one competitor, OfficeMax with sales of $3.3 billion, would remain. Staples pointed out that the combined companies would comprise only about 5% of the total office supply market. However, the FTC considered the superstore market as a separate segment within the total office supply market. Using the narrow definition of “market,” the FTC concluded that the combination of Staples and Office Depot would control more than three-quarters of the market and would substantially increase the pricing power of the combined firms. Despite Staples’ willingness to divest 63 stores to Office Max in markets in which its concentration would be the greatest following the merger, the FTC could not be persuaded to approve the merger.

Staples continued its insistence that there would be no harmful competitive effects from the proposed merger, because office supply prices would continue their long-term decline. Both Staples and Office Depot had a history of lowering prices for their customers because of the efficiencies associated with their “superstores.” The companies argued that the merger would result in more than $4 billion in cost savings over 5 years that would be passed on to their customers. However, the FTC argued and the federal court concurred that the product prices offered by the combined firms still would be higher, as a result of reduced competition, than they would have been had the merger not taken place. The FTC relied on a study showing that Staples tended to charge higher prices in markets in which it did not have another superstore as a competitor. In early 1997, Staples withdrew its offer for Office Depot.
-How important is properly defining the market segment in which the acquirer and target companies compete to determining the potential increased market power if the two are permitted to combine? Explain your answer.

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