Public Policy in Private Markets

Debate 2

Merger wrap up

Announcements

Today: Debate # 2 Pick up HW 3 Turn in HW 5

Debate 3: 4/12 (video due to me by 4/10) HW 6, posted and due on 4/12

Midterm # 2: 4/19 Review: 4/18; 6-8 pm More later

Midterm assessment

Thanks for your participation! Things that seem to work

i>clicker Cases Options for grading Fair grading (although stiff!) Usefulness of PPT slides

Midterm assessment

Things that need improvement Midterm: unexpectedly hard, time issue

This is a capstone course (expected) I failed in conveying the correct expectation Let me work on this:

Practice test will be posted prior to the exam You can turn in practice test the day of the review I will post answer key after review session You can get extra points for doing this (provided

you look at the key and let me know how you would have improved your answers after looking at answer key)

Midterm assessment

Things that need improvement Midterm/grading

Scaling: I will not scale the exams, but will scale final grade

Debate 2

Group 1: Dikesha Patel, Dionne Wisdom, Jason Lai (FTC – merger challenger) First video

Group 2: Devon Bell, Thomas Fantini, Michael Murphy, Aline Desouza (defense side) Second Video

Room for defense (5 minutes, per group) i>clicker questions throughout Please put away your laptops

Controversy

What was the most controversial issue in this case?

A. Geographic market definitionB. Product Market definitionC. Calculation of cost efficiencies

and pass through rateD. Determining entry barriers

Anticompetitive merger?

Do you think the merger would have significantly increased prices of office supplies?

A. YES

B. NO

Clarity of Presentation

Which side presented the clearest case?

A. FTC (merger challenger)

B. Staples – Office Depot

Strength of Arguments

Which side presented the strongest economic arguments?

A. FTC (merger challenger)

B. Staples – Office Depot

Overall assessment of quality of presentation

On a scale from 1 – 10 (1 poor, 10 outstanding), what would be your rating of the FTC’s side?

Overall assessment of quality of presentation

On a scale from 1-10 (1 poor, 10 outstanding), what would be your rating of the defense side (Staples – Office Depot)?

Anticompetitive merger?

Do you think the merger would have significantly increased prices of office supplies?

1. YES

2. NO

Staples – Office Depot

Recall merger guidelines is a two-step process:

1. Market definition

2. Would competition be harmed? Concentration (HHI) Increased prices (unilateral) Entry barriers Cost efficiencies

Market Definition

Key issue: Market Definition FTC: Sales in OSS

Different shopping experience One stop shop Different prices

Mutual recognition Internal documents

No close substitutes Non-OSS can’t discipline OSS

This definition gave 75% of market to merged firm

Market Definition

Staples – Office Depot Superstores, supermarkets, discount stores, on-

line, OSS, etc. Market definition should look at product not seller Costco and Wal-mart can easily expand shelf

space to compete With this definition: 5% - 6% combined market

share

Unique about this case: Inspection of store was critical for judge Identity of seller was used to define market

Likely Anticompetitive Effects Econometric and statistical evidence:

Compare prices going from 2 to 1 and from 3 to 2 competitors

Defendants showed statistical evidence on how prices went down with entry of Wal-mart, Best Buy

Office Depot effect

Staples effect

Likely Anticompetitive Effects Econometric and statistical evidence:

What does competition look like in the future?

Staples-OD : these are not reliable comparisons as 1 and 2 firm markets are different than 3-firm markets

3 to 2 competitors is more important

Likely Anticompetitive Effects

Econometric and statistical evidence: Stock event study: how did Office Max stock price

change after announcement? If merger is expected to increase price, then

competitors also benefit with a price increase If competitors benefit from a price increase, stock

should go up Statistical evidence supported increase in Office

Max stock price as likelihood of merger was higher

Likely Anticompetitive Effects Efficiencies

Defendants: less advertising, procurement costs (economies of scale)

FTC: costs will go down but: Are they merger specific? Economies of scale are nearly exhausted Even if costs go down, will prices? Cost reduction pass-through appears low: 0.15%

Judge: Estimates by defendants unreliable Cost efficiencies are (historically) difficult to

successfully use in court

Likely Anticompetitive Effects

Entry FTC:

There are notable entry barriers: Economies of Scale Economies of Advertising Customer Loyalty “Saturated” Markets (Insufficient Demand)

Staples – Office Depot

Some recent thoughts:

Increasing importance of internet sales (many office supplies are no longer purchased at brick and mortar stores).

Business model: back to small-size stores?

Best Buy, Staples, and even Wal-Mart considering new format

Back to old format?

Back to old format?