Price Hikes Loom For Post-Staples Clients, Expert Says
By Michael Macagnone.
Law360, Washington (March 31, 2016) — Large companies may have no choice but to accept price hikes on office supplies after Staples' merger with Office Depot, according to a Federal Trade Commission expert witness who told a D.C. federal judge mulling blocking the $6.3 billion deal that the new Staples may be the only office supply option for many companies.
The Federal Trade Commission's economic expert, Carl Shapiro, told U.S. District Judge Emmet G. Sullivan that Staples and Office Depot would control 80 percent of the market for business office supplies, and large companies have specific needs like next-day delivery, controlled prices and others that few office supply firms can fill. If Judge Sullivan does not agree with the FTC's argument for a preliminary injunction to block the merger, Shapiro said many large businesses would lose the competition for office supplies that has restrained price hikes.
"They have leverage, they are not babies, they're big businesses, but the way they get leverage is by the threat to go to the other guy," Shapiro said.
Shapiro said that Staples and Office Depot's own documents show they are each other's most frequent competitors, and both the two industry powerhouses and their own customers regard them as the biggest games in town. In addition, he said other firms like Massachusetts-based W. B. Mason form a small part of the market and rarely grab business from the two larger firms.
"It all points to the fact that there are any number of small distributors, local distributors, but they are not in this game," he said.
Shapiro also pushed back against criticism that he had "gerrymandered" his definition of the market, saying he focused on customers and products where the two firms compete most closely. He also rebuffed Staples and Office Depot's assertions that printer ink and toner should be included in the market definition, which has also drawn questions from Judge Sullivan, who has frequently asked questions of the witnesses through the two-week hearing.
"That toner, I'm still hung up on that on that toner and ink," Judge Sullivan said.
"Well, don't be," Shapiro said.
He said that Staples and Office Depot face significant competition from managed print services, which package printer leases, maintenance and ink or toner, indicating that customers may not be as "stuck" in the face of a price increase as they are for the delivery of products like pens, paper and binders.
Shapiro said the specific services offered by Staples and Office Depot to large businesses, including formalized bidding processes, ordering system integration, customized product offerings and negotiated pricing, indicated that he should draw a market among those businesses that may not have many other options, even though it did not directly affect consumers — the hypothetical "Mrs. Smith" Judge Sullivan frequently asked about during the Justice Department's challenge of General Electric's merger with AB Electrolux.
"Even if you are a larger customer, you need to have choices to have bargaining leverage, and that is what we are concerned about here," he said.
Shapiro's testimony, set to continue Friday, built on the past two weeks of the FTC's case against the merger as the agency seeks to prove the merger would harm competition in the office supply market, despite protestations from Staples and Office Depot that any price hike would only be greeted by dried-up revenue from larger customers and the entry of Amazon Business into the business office supply market.
The FTC is represented by in-house attorneys Tara L. Reinhart, Alexis Gilman, Amanda Lewis, Angel Prado, Charles A. Loughlin, David E. Owyang, Haidee L. Schwartz, Helder Agostinho, Joshua Smith, Kelly A. Horne, Kevin Hahm, Kimberley G. Biagioli, Krisha A. Cerilli, Maria M. DiMoscato, Rohan Pai, Ryan Quillian, Stelios S. Xenakis, Stephanie Greco and Thomas Hankins Brock.
Staples is represented by Diane Sullivan, Jeffrey Perry and Carrie Mahan Anderson of Weil Gotshal & Manges LLP.
Office Depot is represented by Matthew J. Reilly, Andrew M. Lacy and Peter C. Herrick of Simpson Thacher & Bartlett LLP.
The case is FTC v. Staples Inc., case number 1:15-cv-02115, in the U.S. District Court for the District of Columbia.