Why The Staples/Office Depot Merger Needed To Be Challenged

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http://www.sun-sentinel.com/opinion/commentary/fl-ktcol-oped0118-20160115-story.html
Why The Staples/Office Depot Merger Needed To Be Challenged

Remember that terrible feeling playing Monopoly when it was your turn and the other player had hotels on every property? That is how many of us would have felt had the FTC not challenged the proposed monopolistic Staples/Office Depot merger.

At one point there were three national players in the office supply superstore market, but Office Depot and Office Max merged in 2013. The resultant "duopoly" allowed competition between the Big Two players at both the wholesale or business to business and retail store levels.

More competition is always better, as it means lower prices and more goods and services. My view is that the rule of three is a minimum, but we must never allow a duopoly to deteriorate into a monopoly.

The motto of the Federal Trade Commission, which just celebrated its 100th anniversary, is "Protecting America's Consumer." This means all American consumers including businesses, organizations and individuals regardless of economic status.

The motto of activist investors on Wall Street is likewise very simple: "Make Money." They do this by buying large amounts of a company's stock to effect a major change, often its merger or sale, to maximize their return.

This is exactly what happened in 2012 when an activist investor became the largest investor in Office Depot and successfully pushed its merger with Office Max. With the resultant profits and market machismo, that same activist investor accumulated a large share in Staples and pushed for the pending monopolistic merger.

With my Ph.D. in applied economics and my ongoing antitrust research, I submitted the first formal independent analysis of this merger to the FTC on Feb. 23. I was not and am not being compensated by anyone, and it is one of many mergers I have challenged on a pro bono basis over the last several decades.

There were a few subsequent challenges to the Staples deal, one of which was based on my analysis. The market, though, was heavily influenced by the continued positive statements from the activist investor, and it was widely assumed the deal would be approved.

On Dec. 7, the FTC unanimously voted to challenge this merger on the grounds that it would harm competition in the wholesale market.

Perhaps because it had such an airtight case in the wholesale market, the FTC did not feel the need to mention the equally strong case in the retail market laid out in my analysis.

The activist investor behind the merger plans to fight the FTC in court, with Staples calling the FTC challenge "misguided" and "fundamentally flawed." They argue customers no longer buy all office supplies from Staples or Office Depot but rather from online retailers or broader mass market merchants or club stores. Unfortunately, neither alternative offers the full range of office supplies available at an office supply super store to all consumers.

Their first "Amazon argument" is almost elitist since it assumes all Americans have computers and shop on the Internet. For example, at least 25 percent of Americans, including tens of millions of blacks and Hispanics, do not shop on the Internet yet have a need for and right to competitive sources for office supplies.

Their "Costco argument" for shopper clubs is likewise inapplicable to everyone not only because of the annual membership fee ("barrier to entry") but also because most of these shopper clubs are located in middle- and upper-income areas. Think about the Costco location near you.

With a Staples monopoly, mass merchants like Walmart are the only real alternative for everyone. Their office supply sections, however, are more like "back to school" departments with nowhere near Staples' depth and breadth of selection.

My analysis to the FTC included a comprehensive shopping survey of three common consumable office supplies and definitively concluded that neither mass merchant retailers like Walmart or Target nor club stores like Costco or BJs are effective competitors to Staples.

By challenging this monopolistic merger, the FTC is living up to its motto of protecting all American consumers, including tens of millions of low- and moderate-income and minority households who are not able to shop online or at club stores.

Dr. Kenneth H. Thomas, a South Florida independent consultant and economist, taught Finance at The Wharton School of the University of Pennsylvania for over 40 years.

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January 19, 2016 at 11:41 AM