Staples seems to be confident in its ability to buy Office Depot (CNN), thus creating a nationwide monopoly for office supply retail: “There’s about to be one game in town when it comes to office supplies.” Presumably the folks involved have researched the likely federal response and concluded that this attack on the consumer will be approved.
I guess that leads to two questions:
- why do we pay the salaries, benefits, and pensions of antitrust regulators if it is even conceivable for something like this to be approved?
- why do Americans bother studying classical “free market” economics if the real economy will be dominated by monopolies like “Staplot”?
We pay antitrust regulators to analyze potential mergers and then file suit to enjoin mergers that are anti-competitive.
The chances of this proposed merger being approved are about 1 out of a trillion. In an antitrust case, the key issue is how to define the market. Staples will argue that you can’t just look at physical office supply stores, but you have to consider other physical stores (such as Walmart) and ecommerce sites (such as Amazon). The regulators will not be dumb enough to accept such an argument. In most cases, that will lead to Amazon backing down. If it doesn’t, the regulators will file suit and it is hard to imagine a federal judge dumb enough not to issue a preliminary injunction.
The only possible exception would be if Staples agreed to divestiture of a significant number of stores.
FTC said no to this merger once before, but smart money is betting that they will say yes this time. Question is, what is the relevant market – if it the market for “office superstores” then no doubt Staplot would be a monopoly (esp. since OD just bought #3 office max). BUT (and this is the big difference since ’96) there are a lot more place nowadays when you can buy pens, paper, fax machines (oops, no one buys those anymore at all), computers, printers, etc. You have Amazon and Costco and Walmart and Best Buy and Target, etc. Staples and OD have had flat sales and have been closing stores. This is not a merger to create a monopoly that can screw consumers but a merger to cut costs so that they can survive. Staplot will still have no pricing power.
The only real gray area is in the segment where large corporations and gov. entities bid for annual supply contracts, where Staples and OD are big players and customers will no longer be able to play them off against each other. But there is little concern in the consumer segment.
My son operates a small mail order business that goes thru quite a bit of shipping supplies – mailing envelopes and labels, packing tape, toner, etc. He gets virtually all of it by mail order on ebay, Amazon, etc. The prices are much better than at Staples, which has to pay for the overhead of all those retail stores. The only time he gets anything at a Staples is when he runs out and he ends up paying several X the online price for the convenience, esp. since he can get generic toner, etc. online but Staples will only carry the name brand (or if they carry their own brand, they price it only slightly below the name brand). They already closed a couple of the Staples that were near my house and I’m surprised that they haven’t closed even more. And if the merger goes thru they WILL close more – the synergy in this deal is from the combined companies getting smaller, not bigger.
It’s of course ironic because Staples and OD put all the mom and pop office supply places out of business, but that’s how it goes – the revolution eats its young. Ask Circuit City.
“a nationwide monopoly for office supply retail”
Except for OfficeMax. And Amazon. And, for that matter, a large number of smaller, less-famous-than-Amazon internet sites that also sell office supplies.
Trying to remember the last time I was in a Staples or Office Depot store. I think it was before I was married. I wanted check paper, which of course they didn’t have, because nobody stocks that in B&M stores, and they didn’t then either, so I had to order it off the internet anyway. (Before internet shopping, they must have sold it out of print catalogs or something. Which…yeah, those still exist too, although I’m sure the remaining catalog-based vendors do most of their business through the web nowadays.)
>Except for OfficeMax.
Office Depot already bought out Office Max. Try typing Officemax.com into your browser and see what happens. You probably didn’t notice because haven’t been to an officemax in years.
Having a “monopoly” in a dying business is a dubious honor. Ask Borders.
>The chances of this proposed merger being approved are about 1 out of a trillion.
Staple is betting $250 million (the breakup fee) that you are wrong.
@James Mitchell,
Can I get those trillion to one odds for a friendly wager?
This merger will absolutely occur. As has been stated earlier here,
a lot has changed since 1996.
There is no such thing as an office supply monopoly in 2015. Unless Obama decides
we all don’t deserve Internet usage privileges any longer.
Sometimes despite the presence of highly-paid M&A advisers, companies make the wrong bet. AT&T had to give $3B in cash and spectrum valued at ~$1B to T-Mobile when that merger got rejected.
Chris – that’s why it’s called a bet. If it were a sure thing then they could have offered even more. So maybe they figured it had a 9 in 10 chance of being approved and this was the 1 in 10. But if Staples really thought that their chances of being approved was only 1 in 1 trillion, there’s no way they would put down a $250 million breakup fee. They are probably figuring on better than even odds.
The breakup fees serves as a measure of how much you are willing to do to get yourself past the FTC – sell off a division or locations, etc. As long as it will cost you less to satisfy the FTC than it will to pay the fee, you will do what it takes. So by setting a high breakup fee you are saying to your target that you will do whatever it takes. But sometimes nothing you can do will satisfy the feds.
I think Philip’s second question is the most interesting. The steady state of our market economy doesn’t seem to be diversity and continuous competition.
When you learn economics you start with a simple model of free market conditions . Of course that model does not reflect the real world. For example, you learn that price is based solely on supply and demand – this applies for commodities like corn, but a lot of prices are “sticky” upward. Monopolies are another exception. If your understanding of economics stops at the basic level then you consider it to be worthless because it so obviously does not model real life. To be honest, none of the economic forecasting models work all that well (or else they could make a ton of money in the stock market, etc. and they don’t) but they are considerably more sophisticated than what you learn in Econ 101.
You learn the classical model for the same reason that beginning music students are taught to play in tempo and in tune. Later on when you know what you are doing you can start to mix it up, but first you need to learn the basics.
@michiel,
In a classical free market individual entities do not have pricing power, but that does not mean they are exactly the same in terms of financial health, micro environment etc. With every turn of the business cycle, most entities will be stressed but not to the same extent. When some (more highly stressed entities) fail, the opportunities created will not be evenly distributed amongst the remaining players (and any new entrants) because some of them will be better positioned to take advantage of those opportunities than others. This process naturally pushes an economy toward higher concentration of economic power over time. There are other processes which do the same, and some which do the opposite. Unless these forces balance exactly over a wide range of economic conditions, the steady state will not be diversity and continuous competition.
That’s wonderful, but music theory doesn’t have political implications. It’s easy to get people to buy into a system that gives everyone a fighting chance, and offers the best to consumers at the lowest price. Easier than telling them the market is going to be dominated by a few huge players who’ll happily let their customers pay the costs of their boards’ excesses.