Lynne Kiesling
Mike and I are on the same wavelength this morning; his earlier post about the Whole Foods/Wild Oats merger case came right as I was reading this morning’s paper. Today’s Wall Street Journal has a story about the expert testimony for both sides (WF/WO and FTC) of the case (sub. required). Of course, the outcome will hinge on the definition of the market in which these firms participate, so this is where the testimony focuses.
During questioning from government attorneys, David Scheffman, an antitrust consultant and former FTC official, told the court the natural-foods stores don’t just compete with each other, as argued by the FTC, but are part of the broader supermarket industry. “They are supermarkets. They are one-stop shopping,” Mr. Scheffman said, arguing that market research shows people who shop at a Whole Foods also use grocers such as Trader Joe’s Co. and Safeway Inc.
University of Chicago economist Kevin Murphy submitted testimony on behalf of the FTC, arguing that the merger would “reduce competition”:
University of Chicago antitrust expert Kevin Murphy also faced hard-nosed questions from attorneys for the natural-food stores as the companies sought to expose weaknesses in the FTC’s analysis that the proposed merger is anticompetitive for the narrowly defined premium natural- and organic-grocery market.
But Mr. Murphy, in oral testimony, said he found margin and pricing evidence indicating competition between the two companies can lead to lower prices in specific geographic areas. Mr. Murphy cited a “substantial decline in margins” and a 2% drop in prices at Wild Oats stores in Boulder when Whole Foods entered that market. Testimony regarding Boulder was challenged by the company attorneys and may not be considered by the court because it wasn’t part of Mr. Murphy’s submitted testimony.
I know that is the standard comparison used in antitrust analysis, but frankly, I don’t think it reflects the essence of dynamic, rivalrous competition. Even if I do take this synopsis of the not-yet-available testimony at face value, how big is 2% when we’re talking about high-end retail sales to customers whose demands are not exactly the most price elastic? Honestly, I’m not going to get bugged about a 2% estimate when I view it in the context of the other operational savings that might accrue and the potential responses of other retailers in the market.
Here’s what I want to know in order to evaluate the merger: how dynamic is the rivalry between Whole Foods and other stores in markets where there is only Whole Foods and not Wild Oats? How dynamic is the rivalry between Wild Oats and other stores in markets where there is only Wild Oats and not Whole Foods? In the markets where both Wild Oats and Whole Foods exist, what is the composition of the other stores in the market? Is there a Trader Joe’s? Is there a Wal-Mart selling organic? Other supermarket chains? To what extent have they, or could they, extend their product lines into organic and gourmet foods?
This little snippet of Kevin Murphy’s testimony does not suggest that his analysis is sufficiently focused on the rivalrousness of the market process when only one of these firms is present in a market compared to its rivalrousness when both firms are present in a market. Data on a specific outcome in a specific timeframe does not speak sufficiently to the degree of rivalry or potential rivalry possible in a post-merger market.
OK, antitrust buddies, tell me why I’m being naive or insufficiently pragmatic …
Much as I am opposed to this merger (see my posts here, here, here and here), this is almost surely the reporter’s fault, not Kevin Murphy’s. The only thing that suggests to me that my assessment of this case may be wrong is that Kevin Murphy is on the other side of it. I can’t imagine that he would not have asked the questions you did. Among other things, how long had Whole Foods been there? Was there time for the existing Kroger and other markets to reposition their product lines to compete down prices on organics before Wild Oats moved in? This snippet about Boulder is irrelevant if we don’t also know what other competition was there, and compare it to price effects in geographic markets with different dynamics.
All that said, I would wager that even KM didn’t look generally into product repositioning by competitors. It just isn’t part of existing models, but that’s a huge lacuna. Given repositioning, the case just doesn’t pass the smell test. As you note, there are 85,000 grocery stores and no barriers to entry. Does anyone really think it’s possible to maintain a monopoly in this environment? Is it really likely that a combined Whole Foods/Wild Oats could maintain 10% price increases without inducing even a small fraction of existing stores to remodel a bit and adjust their product offerings? No way. This is a retail market with notoriously miniscule margins–10% mark-ups would be incredible (which is probably why KM was focusing on 2% effects, not 10% effects). It’s just absurd.