Why Staples and Office Depot should have merged (blocked by FTC and DOJ).

Essay by Jonus010University, Bachelor'sA-, December 2002

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·Problem:The FTC is trying to block the Staples/Office Depot merger because it has reason to believe that the proposed merger would violate Section 7 of the Clayton Act: it may lessen competition or create a monopoly.

·Staples, Office Depot, and Office Max may be the largest office supply retailers on the market, but what is there individual market share? Without these facts the HHI cannot be calculated. If they each control about 10% of the market, the proposed merger would hardly be a problem. The FTC uses a very narrow approach to defining the office supplies market.

·Following the previous point we cannot define the market because we do not know the relative size of each firm. If the merger results in a 10% market share, this can hardly be considered a "market power" or "monopoly." In this case, the merger does not violate Section 7 of the Clayton Act and is not illegal.

·The FTC is quick to point out that prices are much lower in regions where two superstores exist rather than just one or the other. The FTC concludes from this that a merger will raise consumer prices. A good explanation for this is that in areas served by both Office Depot and Staples have higher population densities than do areas in which only one of these retailers is present. Higher population densities mean greater sales revenue per square foot per day - which in turn means that, firms in high-population regions can spread their fixed costs more widely. The result is lower prices, not higher prices.

·The FTC argues that prices will be too high where only the merged superstore exists. However, the price increase will be small due to the threat of competition from Office Max and other local office supply retailers.