Case Study: Proposed Merger Between Staples and Office Depot

How would you classify the office superstore industry? Who are the competitors? What are the characteristics of this industry that lead to this conclusion?

*The office superstore industry is an Oligopoly, their allocation to this category is due to the large firms within it, being between two and ten as stated by Baye, also the goods/services rendered by the firm(s) may be identical or differentiated. The varied types are Sweezy, Cournot, Stackleberg & Bertrand (2015).

Best decisions by a firm in an oligopoly are hinged on perceived potential responses or possibly lack thereof of other players and/or rivals in the industry for example pricing, location, goods/services type, etcetera. The companies within the industry have a high portion of control divided between each other. Oligopoly structure seems to fall between the models of monopoly and competition. Finally each firm has market power (“Product Differentiation, Monopolistic Competition”, n.d.).

*The competitors are Staples, Office Depot and Office Max.

*Characteristics of the oligopolistic market structure include: but is not limited to-

Pricing and Strategy- firms have control over the prices and strategies used in the industry. For example, Office Depot’s advert in 1997 where consumers of different locales but within the same state of Florida pay a 39% increment on Copy paper just because the other two main competitors are absent.  While for strategy, the firm(s) go into locals/markets the other competitors are already present in, in a plan to create additional competition in those places.

Market Entry: is not as permeable as other industries. New firms can not just gain access, process entering the industry is longer than the average Industry. For example as mentioned in the case BestBuy tried for a couple of years, then failed and resorted to its previous primary focus outside of office superstore. In the instance of an entrant forces its way in, the oligopolies will either “drive thousands of independent stationers out of business, eliminating by acquisition, or bankrupt of rivals who sort to compete with the oligopolies” (Baye).

Shot-Callers: these three competing office superstores are influential on what goes on in the industry.

Niche: it’s a niche-like industry, with a specialty and focus involved involved in entry, participation similar to Oil refinement etcetera.

References

Baye, M. R., (2014). Managerial Economics And Business Strategy. McGrawhill-Hill Companies, Inc. New York, N.Y.  8th ed. Pp 364-371

Product Differentiation, Monopolistic Competition, and Oligopoly. (n.d.) Stanford University. Pp 279. Retrieved from https://lagunita.stanford.edu/c4x/HumanitiesSciences/Econ_1/asset/WEEK3-2_MonopolisticCompetition_Oligopoly.pdf

  

2

What barriers to entry help maintain the industry structure?

Barriers to entry are are obstacles that prevent the entry of a firm into a specific market, especially when the market is perceived to have high demand and in turn yield high profit. Barriers to entry of an industry is used to measure the level of competitiveness of the industry. There are various barriers, for example - The economies of scale: occurs when average production costs go down while output/revenue is simultaneously going up. Economies of scope: occurs when a new product is added to the portfolio, which reduces the average production cost while increasing output at the same time. The edge that Staple, Office Depot and Office Max had over potential and new entrants is the economies of scale and scope, as “new entrant would not only have to establish a presence in each of the local markets affected by the transaction, but would also have to enter on a nationwide scale. Staples, Office Depot and OfficeMax each have a nationwide network of approximately 500 or more stores. By operating at such a large scale, each of these firms is able to leverage their huge volumes into price concessions from their suppliers. They also are able to distribute most efficiently by setting up regional transshipping centers (Baye et al, 1997). Minimum capital requirements to invest in this superstore industry, as quoted earlier, the main players already have a running-cost-effective network, that would  the new entrant a couple of years to compete on the same level and on the condition that the firm brought its financial A game. Regulatory requirements to enter the sector that is government, industry, unions, associations etcetera. Price wars or predatory pricing can be a hinderance to entry, with bulk of the market power/share split between the three main competitors whose pricing hinges on each other’s action, reaction or inaction, the potential/new entrants can not and is not afforded participation in such “revenue-roulette”. This price control is primarily done by one of the three to outearn the other two, but it is hard for a new entrant to compete in such an environment especially when one is nicknames.

Barriers have its use and advantages for existing industry players especially with planning and price control (Oligopoly like these). “Barriers to entry stabilizes market structure” (Abbring et al, 2006).

References

Abbring, J. H. & Campbell, J. R. (2006). Oligopoly Dynamics with Barriers to Entry. Columbia. Retrieved from https://www8.gsb.columbia.edu/rtfiles/finance/Industrial/Spring%202007/Jeff-Campbell-2007.pdf

Baye, M.R. et al (1997). Proposed Merger Between Staples and Office Depot Leads to Concerns of Higher Prices.

3

If the merger were to be allowed, how would you characterize the merged firm’s own price elasticity in a geographic market that contained only that firm? How would this change over time?

Price Elasticity Demand; this economic concept measures the responsiveness of quantity demanded to a change in price, can be utilized in determining the quantitative impact of price hike or cuts on firm’s sales and revenue(Baye, 2014)

The merged firm’s price elasticity of demand in a geographic market where it is alone, is inelastic: meaning, even with an increase in prices, there is very minuscule change in amount demanded by consumers. The price elasticity of the merged firm is below one, partly due to the low number of relevant competitors making it an oligopoly, also the duopoly created by the merger increasing its market share, further enhanced by absence of competitor(s) in the geographic market being discussed, the merged firm does not have to work as hard to maintain consumers with their prices since the options are slim/next to none in these 15 locations if “copy paper” is 34% higher in cost pre-merger pricing, the post merger pricing will remain the same or higher.

Reference

Baye, M. R., (2014). Managerial Economics And Business Strategy. McGrawhill-Hill Companies, Inc. New York, N.Y.  8th ed. Pp 77-80

4

What is the relevant market for this case? Should retailers that sell, but do not specialize in office products, be considered as part of the market? What evidence supports this conclusion? What are geographic considerations?

Relevant market for this case is an oligopoly.

No, retailers that do no specialize in office products, should not be considered as part of the market.

The Staples and Office Depot’s potential merger will not alter the Oligopolistic nature of the office superstore market, rather there will be two major competitors instead of three as it was before the merger, with Office Max now the only major competitor.  A prominent example of an industry characterized by a duopoly is the large commercial airplane manufacturing industry, where Boeing and Airbus.

    The type of offerings provided by the niche market plays a major role in defining who member should be in the sector, that is; no one, no even the touted “repositioners” like Walmart, Target, etcetera who though have the network can provide offerings that fulfills same identified needs of the consumers, as these retailing giants do not offer options like product line, inventory on hand and the convenience that office superstore customers have come to know and expect.

This means, even other sellers that have office stationeries and such, as part of shelf products are still not seen as specialized or part of the market.

   The case study reflects that even with the presence of other non-specialized retailers like Best BuyTarget, Sam's Club, Kmart etcetera. this does not determine price differences but rather it is  the presence of superstore competition in the market that would.

Geographic considerations post-proposed merger between Staples and Office depot determines impact in certain locales, if the merger does occur.

In 15 locations, post-merger period, to put it bluntly, the now merged company through previous staple stores will run roughshod over consumer and the pricing as no competition is expected in this area(s) anything.

Reference

Baye, M. R., (2014). Managerial Economics And Business Strategy. McGrawhill-Hill Companies, Inc. New York, N.Y.  8th ed. Pp 364-371

5

How is the Herfindahl-Hirschman Index affected by the merger? Why does the case list a range, instead of an exact number? Are the HHI levels in the case indicative of high industry concentration?

According to Department of Justice (Antitrust Division), the Herfindahl-Hirschman Index is a commonly accepted measure of market concentration, calculated by squaring the market share of each firm competing in the market and then summing the numbers” (“Herfindahl-Hirschman Index”, 2015).

With the proposed merger, the Herfindahl-Hirschman Index is raised above levels seen as legal. As the number of competitors reduce for example as this would have been case with the proposed merger; the office superstore industry will go from three main competitors to two main competitors, hence simultaneously increasing the market share and power wielded by each player. It is worthy to note that, with the merger, Staples and Office Depot will attain 100% in some locales (15) where there is no competition with the only other competitor in the newly emerged duopoly and a further average of 70% in 27 other metropolitan areas.

“It has achieved an unusual degree of visibility for a statistical index because of its use by the Department of Justice and the Federal Reserve in the analysis of the competitive effects of mergers” (Rhoades, 201 ).

 In the case of Staple-Office Depot merger, analysis revealed negative effect on competition in the industry hence consumers don’t get to enjoy the better/lower pricing that results from competition among firms who are trying to boost individual market share(s).

Reference

Herfindahl-Hirschman Index (2015). Antitrust Division, Department of Justice. Retrieved from https://www.justice.gov/atr/herfindahl-hirschman-index

Rhoades, S.A. (n.d.). The Herfindahl-Hirschman Index. Division of Research and Statistics. Pp 188. Retrieved from https://fraser.stlouisfed.org/files/docs/publications/FRB/pages/1990-1994/33101_1990-1994.pdf

6

What arguments have Staples and Office Depot made in defense of the proposed merger?

Staples and Office Depot merging was opposed as it was seen as merger that would end competitiveness in the industry, with the dominance of two giants (Staples-OfficeDepot and Office Max -a duopoly. At this point, there will be full domination of market, price control, etcetera. In defense of the merger, Staples and Office Depot claim it will allow for; generation of significant cost savings, “by using the "best purchasing practices" of both companies and by pressuring suppliers to give them bigger discounts” (Baye et al, 2015).

Also, as with oligopolies, there is a higher barrier to entry than most industries due to the majority market power/share that will be increasingly wielded by Office Max and the “merged” Staples-Office Depot. In their own defense, the two companies have “argued in the alternative that the functional equivalent of entry would be repositioning by an existing retailer to attract office superstore customers. The likely "repositioners," they assert, are retailers such as Target, Wal-Mart, and Kmart, and computer superstores catering to small businesses, such as Best Buy”

According to Baye “the evidence, however, will show that the claimed efficiencies are not likely to benefit consumers, are speculative, and can be achieved through means that do not have the dramatic anticompetitive effect of the merger. As a result, efficiencies are not a defense to the anticompetitive effects likely to result from this merger. The acid test of efficiencies is whether they benefit competition. Also  It would require a dramatic change to the entire nature of “repositioners” operations. And, it is unlikely that such changes would be undertaken.