Question

In the United States, the Federal Trade Commission (FTC) is charged with promoting competition and challenging mergers that would likely lead to higher prices. Several years ago, Staples and Office Depot, two of the largest office supply superstores, announced their agreement to merge. a. Some critics of the merger argued that, in many parts of the country, a merger between the two companies would create a monopoly in the office supply superstore market. Based on the FTC's argument and its mission to challenge mergers that would likely lead to higher prices, do you think it allowed the merger? b. Staples and Office Depot argued that, while in some parts of the country they might create a monopoly in the office supply superstore market, the FTC should consider the larger market for all office supplies, which includes many smaller stores that sell office supplies (such as grocery stores and other retailers). In that market, Staples and Office Depot would face competition from many other, smaller stores. If the market for all office supplies is the relevant market that the FTC should consider, would it make the FTC more or less likely to allow the merger?

Short answer

Answer: The FTC is more likely to consider the argument from part a, which focuses on the potential monopoly created by the merger in many parts of the country, leading to higher prices and decreased competition. However, they may also weigh the argument from part b, which emphasizes the larger market for all office supplies and the presence of more competition in this broader market. Ultimately, the FTC will make their decision based on which scenario best aligns with their mission to protect consumers and maintain a healthy competitive environment.

Step-by-step solution

Part a: FTC's decision based on monopoly and higher prices

The critics argue that the merger between Staples and Office Depot would create a monopoly in the office supply superstore market in many parts of the country. If this is true, the merger would likely lead to higher prices and decreased competition, which is against the FTC's mission. Thus, it is unlikely that the FTC would allow the merger based on this argument.

Part b: Considering the larger market for all office supplies

Staples and Office Depot argued that the FTC should consider the larger market for all office supplies, which includes competition from smaller stores and a variety of retailers. In this larger market, Staples and Office Depot would face more competition, implying that the merger would not necessarily lead to a monopoly. If the FTC considers the larger market, it would make them more likely to allow the merger as the impact on prices and competition may be less significant compared to the situation in part a. The underlying assumption is that the larger market would have enough competition to keep the prices in check and maintain a healthy competitive environment.