Key nonmarket issues - Whether to allow Staples and Office Depot to merge on the basis of antitrust concerns.
Interests - The three office supply superstores, Consumers, Competitors like other Superstores (e.g. Walmart, etc.), Manufactures, Suppliers, Labor organizations.
Institutions - Courts, FTC, DOJ, Congress.
Information - Asymmetric (FTC has done a lot of research and know quiet a lot to support the antitrust case but Staples and Office depot will know more about the relevant product market, Pricing etc.),
Incomplete (e.g. Whether it was possible to pass through the improvements in efficiencies to the consumers and if yes how much), Contested (Whether the definition of the relevant product market was right, etc.).
Nonmarket issue lifecycle analysis - The issue was in the legislative stage. FTC had contested the merger of Staples and Office Depot on the basis of antitrust concerns and now the courts have issued a preliminary injunction. But instead of continuing with the trial the companies have decided to terminate the merger. Hence it can be said that issue is in the enforcement stage of the issue life cycle.
Brief answers to the end of case questions -
1) What was the key finding by the court that effectively decided the case for a preliminary injunction?
While making a decision the court required the FTC to show that its challenge was likely to succeed and in balancing the equities it was of greater harm to let the transaction proceed than to reverse it later. The key finding by the court was the definition of the relevant product market as “office supply superstores”. FTC supported its claims by using the pricing differences in one firm market as compared to two and three firms market and also by demonstrating that the price sensitivity and cross elasticity of demand was low when one firm scenario prices were compared markets with other warehouse clubs. Also the internal documents obtained from the companies in which the companies referred to the competition as the office superstore industry and the distinctive features like appearance variety of items etc. offered at a store helped define the market as office superstore. With the relevant market now constrained to office supply stores only, FTC was able to prove that the concentration figures were very high and the barriers to entry were high making it impossible to reduce the anticompetitive nature of the industry in future. So the courts concluded that the FTC had shown that they had a strong case and were likely to succeed on its merit. Also, post merger the companies decided to consolidate the warehouses, close 40-70 stores, renegotiating contracts with the manufactures and consolidate management, which will ultimately result in substantial layoffs. The private equity at stake here was the loss to the Office Depot shareholders but the court thought the loss of this private equity does not justify the denial of the preliminary injunction as the public equity clearly supported it.

2) Was the courts analysis of the pricing data appropriate for determining the likely effects of the merger?
The courts analysis to find the effects of the merger had some serious flaws.
Firstly, these studies did not take in to consideration other factors affecting prices, like the size and nature of the regional market, its population or the presence of other discount retailers that sell office supplies. It would have been more effective to see what happened to prices when a second office supply superstore chain entered a one office supply superstore area, thus turning the one office supply superstore area into a two office supply superstore area. Because in this case the other economic factors affecting pricing would generally be similar before and after the entry of the second chain, this approach holds those other factors constant. Secondly, the price comparisons were a snapshot of price differences at one point in time and again they pooled all Staples stores together into a single model instead of having separate models for different parts of the country. Lastly, the FTC changed the definition of the relevant market from the total market for office supplies to the market served only by the office-supply superstores. Staples and Office Depot together sell only about 5.5 percent of total office supplies. The FTC’s restricted definition of the relevant market ignores reality by assuming that the office-supply superstores face no effective competition from the many other types of stores and online retailers selling office supplies. As the first paragraph in the case mentions that Staples and Office Depot grew and prospered offering low prices to its price-sensitive customers. And they will prefer to go to the store that gives better prices.

3) Could Staples and Office Depot be reasonably expected to pass two-third of any cost efficiencies through to consumers?
The efficiency claims made by the companies seem to be exaggerated for several reasons. First, only efficiencies that are achieved after the merger should be credited, that is, efficiencies likely to be achieved before the merger should be deducted, as they are irrelevant to the analysis of that merger. In this case, much of the anticipated efficiency gains were the result of the merged firm’s increased scale. But if the parties planned to grow independently, many scale-related efficiencies could be expected in a short time through internal growth and the firms will be able to achieve economies of scale without the merger. The second reason for the skepticism is the lack of support by reliable evidence. In particular, the efficiency claims made by the parties increased dramatically between the times that the deal was first approved by the Staples’ board and the time that the parties submitted an efficiencies analysis to the FTC. Because it was not clear what new information or insights the parties gained in that time period, there was a strong presumption that the substantially lower cost saving estimates first presented to the Staples board look more reliable. Thirdly, The pass through of efficiencies in the form of lower prices seems to be unrealistic. In this case, the proposed merger would have substantially reduced competition. Further, any cost savings would have been limited to the merged firm. Therefore, estimates of the share of cost savings that the parties had passed on to consumers can be significantly overstated because of the ambiguity of the share of any merger specific cost savings that would be passed on.

4) Since Staples and Office Depot and their attorneys understood the antitrust laws and the facts the court would examine, why did they believe that the FTC and the courts would not block the merger?
Staples and Office Depot and their attorneys must have thought that the merger does not have anticompetitive consequences, as according to them they were a part of a broad market for selling office supplies in which they held a very low share as the products sold by them were not different than other retailers. Also they must not have expected the use of internal documents for market definition. Also the companies anticipated that the merger would not raise prices. They were sure the efficiencies improved by the merger would add value to the customer. The companies can reduce costs by, increasing the total volume of products purchased and decreasing the prices paid to manufacturers and by lowering administrative, marketing, advertising, distribution costs. They thought that they will pass on to consumer 2/3 of such cost reductions, and would be able to cut prices significantly. They thought that much of the efficiencies could not be claimed without the merger. Even if some growth was possible from internal expansion it would be achieved faster after the merger. They also thought that there were low barriers to entry, as the stores were constructed fast and especially there was ease of expansion for the existing firms and by increasing shelf space existing multiproduct retailers can enter/expand into office product market with low costs.

5) As a commissioner of the FTC, how would you have voted on the consent decree negotiated by your staff?
I would have voted in favor of the consent decree. I don’t agree with the FTC’s definition of the relevant product market to include only the office supply stores and not the total market for office supplies. Staples and Office Depot together sold only about 5 percent of total office supplies. This new product market will get the concentration figure down by reducing the HHIs. This market definition will also show that the barriers to entry were low. Also, the office supply superstores dealt with price sensitive customers who will go to the other options if the prices were not controlled (This curbed the unilateral effects.). As Staples and Office Depot agreed to sell 63 of their stores to Office Max to maintain two-superstore competition in markets, after the merger, would otherwise have only one superstore. This will definitely dilute the anticompetitive effects. And as with the new relevant market definition and lower concentration figures and lower barriers to entry a company offering a new product or service should not be penalized on the theory that it may cause a monopoly, as long as there are low barriers for a competitor who wants to enter the market.