Case Studies

Gregory K. Leonard

2

Staples Acquisition of Office Depot

3

Price Comparison Across Price Zones

In 1995, Staples price when Office Depot is present (Los Angeles and New York)

– $0.74

In 1995, Staples price when Office Depot is not present (Indianapolis)

– $0.81

Staples price is 9.8% lower when Office Depot is present

4

Price Comparison Before and After Office Depot Entry

In Los Angeles in 1995, Staples price when Office Depot was present

– $0.74

In Los Angeles in 1994, Staples price when Office Depot was not present

– $0.75

Staples price is 2.6% lower after Office Depot entered

5

Which Measure is Better?

The first measure compares Los Angeles and Indianapolis at one point in time

– Good: Controls for any time-related factors that might affect all cities

– Bad: Does not control for anything that is special about Los Angeles or Indianapolis that might explain the price difference

The second measure compares Los Angeles before and after Office Depot entry

– Good: Controls for anything that might be special about Los Angeles by comparing it to itself

– Bad: Does not control for any time-related factors that changed over time

6

A Better Method: Difference-in-Differences

Compare the change in price in Los Angeles (where Office Depot entered) to the change in price in New York and Indianapolis (where there was no change in Office Depot’s presence)

Los Angeles change = -2.6%

– Reflects the Office Depot effect and time-related factors

Average change for New York/Indianapolis = +1.3%

– Reflects only the time-related factors

Difference = -2.6 – 1.3 = -3.9%

– Reflects only the Office Depot effect

7

Alleged Price-Fixing in the Graphite Industry

8

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Time

Price

Graphite Prices

Alleged Price-Fixing Period

9

What Would the Price Have Been If There Had Been No Price-Fixing?

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Time

Price

Price If There Had Been No Price-Fixing?

10

More Accurate Approach

Without price-fixing, price would have been determined by supply and demand factors

Approach

1. Identify the supply and demand factors that affect the graphite price

2. Statistically fit the relationship between price and these supply and demand factors using data from outside of the period where there was price-fixing

3. Use this statistical relationship to “predict” what prices would have been during the price-fixing period if there had been no price-fixing

11

“Simple” Model

Supply factor: Price of natural gas

Demand factor: US industrial production

12

“Simple” Model

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Time

Price

Price If There Had Been No Price-Fixing

8 percent overcharge

13

Better Model

The “simple” model may be too simple

Better model

– Supply factors: price of natural gas, petroleum coke, electricity, and labor

– Demand factors: industrial production for each of the industries where graphite is used, including chemicals, glass, aerospace, metallurgy, and semiconductors

14

Better Model

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Time

Price

Price If There Had Been No Price-Fixing

2 percent overcharge

15

Did “Unexplained” Price Increases Follow Meetings?

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Time

Price

First Alleged Meeting

Second Alleged Meeting