March 23 1997 3:30 AM


Are Staples and Office Depot merging to do you a favor?


In full-page ads in major newspapers, Staples and Office Depot assure the public that their proposed merger into a $10 billion office-products giant will lead to lower prices for office supplies. Their "larger operations and greater buying ability," they say, will produce lower costs, and that will "mean bigger savings for you." How thoughtful.


But maybe you suspect that when the two top competitors in a market stop competing and merge, the result will be higher prices, not lower. This kind of thinking goes by the name of "antitrust"--a concept that's been out of fashion in recent years. The Federal Trade Commission shares your suspicion and voted, 4-1, to hold up the deal. The FTC has even been inviting public comments over the Internet--reportedly a first for any federal agency. And the Web is chattering with amateur antitrust sleuths. (To read the discussion, or to join in yourself, check out some of the newsgroups addressing the topic.)

For some people, office supplies are a subject that inspires much passion. The CEO of Office Depot told Reuters that he's using bodyguards because of threats, apparently from his employees. A few of these employees, at least, seem to buy their executives' argument that the merger will (probably) lead to price cuts because it will (definitely) lead to job cuts. Other believers include investors who have bid up the stock prices of both firms.

Is it possible that Staples and Office Depot have a case? That their merger would be good--or, at least, would not be bad--for consumers? Since the 1970s, both the Department of Justice and the FTC have taken a far more tolerant view of mergers and acquisitions, partly on the grounds that increasing international competition provides a check on U.S. conglomerates. Few Americans, of course, buy their office supplies in foreign countries. But the agency has also become more sensitive to the details of particular products and markets. "Bigness" per se is no longer sufficient grounds for suspicion. Account must be taken, as many economists have long argued, of the greater operating efficiencies and, hence, presumed lower costs produced by concentration. Moreover, if a company hoards its savings from size, instead of passing them on to consumers in lower prices, new competitors will enter the business.


B ut the merger of two former competitors is inherently more suspicious than a company that comes to dominate the market through its own growth. And appreciation of the competitive market's marvelous capacity for self-regulation can be carried to extremes. Markets bear watching--and common sense is often a better guide to regulators than the advice of battling experts. These experts will run regression analyses and estimate the cross-elasticities of demand. And they will compute Herfindahl-Hirschman indexes that show the measure of concentration in a given market. And in the end, the regulators will have to consult their own judgment.


Consider the question of what constitutes the market in which Staples and Office Depot compete. The companies want to define the market as broadly as possible. They would include not only such small-scale office-supply retailers as may survive in the cities they have invaded, but mammoth outlets like Wal-Mart and Circuit City, which sell some office supplies. By this measure, the companies' analysts figure, the combination of Staples' 553 superstores in 100 markets across the United States and Canada and Office Depot's 571 North American outlets (mostly superstores) would still command less than 10 percent of the market.

But the FTC takes a different view. Sure, you can buy many of the products that Staples and Office Depot sell in other places. But their strength as competitors lies in their being one-stop office-supply superstores where all these products are brought together in one (often bewildering) agglomeration. And in this market, there are only three competitors--Staples, Office Depot, and a third rival, Office Max. A merger of the first two would allow them to control two-thirds or more of the relevant market, dominate suppliers, and drive out upstart competitors.

The FTC has some telling facts to back up its theory. The agency has sales data showing that prices are lower in markets where two of the three superstores compete--and lower still where all three are in local competition. In other words, forget market-share equations: Look at prices to find the real story. Another common-sense check: One big reason that Staples was anxious to merge with Office Depot was that it feared an Office Depot invasion of its home turf, New England. What did it fear, exactly, if not that competition would force it to lower its prices?


T he essential question is whether the predicted cost efficiencies of a merger will outweigh the lost discipline provided by competition. (It is ironic to see, for example, the Wall Street Journal fulminating against government interference with this merger, since the notion that the efficiencies of bigness outweigh the discipline of competition used to go by the name socialism, or even the name communism.)


Is the cost-cutting story plausible? As a dominant buyer, Office Behemoth could command concessions from Paper Clip Inc. But surely these two superstore chains are already big enough to squeeze suppliers quite effectively. What's to gain? More likely, any cost savings would come from eliminating stores in shared markets--that is, from eliminating stores that currently compete with each other.

The FTC seems inclined to steer a middle course: Permit the merger, on condition that Office Behemoth sell off 63 superstores to the remaining competitor, Office Max. The stores would be sold at bargain prices, and many are located in communities where there would otherwise be no post-merger competitor. The commission seems to be giving some credence to the claimed benefits of the merger, while hedging its bets on the competition issue by shoring up Office Max and seeding healthy retail conflict in scores of communities.


This moderate course doesn't satisfy the most avid consumerists. Ralph Nader, for example, notes that if Office Max now supports the merger, which it does, that makes you wonder how much real competition is in the offing. If the fast-food world had only three players, and McDonalds's proposed to buy out Burger King, how reassured would we be if they offered the palliative of selling a few franchises to Taco Bell? Do you take comfort that, in some sense, Red Lobster will provide competition? Not much.

Much of the Internet discussion about this merger frames the issue as: Which is worse, Big Business or Big Regulator? In my view, the FTC seems to be getting the balance about right: neither rolling over and playing dead nor being blind to business practicalities and long-run competitive innovation in retailing (new kinds of superstores, discount shopping on the Net. Who knows?).

Interestingly, too, the FTC seems to have picked an issue to take a stand on that really matters to people outside the Washington beltway. Our government, at work, on a messy problem with real consequences to our everyday lives. That could be trust building, if not trust busting.