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MARKET STRUCTURE AND THE MERGER’S PRESUMPTIVE ILLEGALITY

Staples and Office Depot are by far the two largest vendors of consumable office supplies to large B-to-B customers. When large B-to-B customers issue RFPs for the sale and distribution of office supplies, Staples and Office Depot (including OfficeMax, which was acquired by Office Depot in 2013) are usually the two finalists for the business. In fact, Staples and Office Depot are often the only two companies that submit a proposal to supply a broad range of consumable office supplies on a nationwide basis.

The Merger Guidelines measure concentration using the Herfindahl-Hirschman Index (“HHI”). The HHI is calculated by totaling the squares of the market shares of every firm in the relevant market. Under the Merger Guidelines, a merger is presumed likely to create or enhance market power—and is presumptively illegal—when the post-merger HHI exceeds 2,500 and the merger increases the HHI by more than 200 points.

The market for the sale and distribution of consumable office supplies to large B-to-B customers is highly concentrated, and the parties control the majority of sales. Post-Merger, the market would be substantially more highly concentrated than it is today. Post-Merger, Staples would control more than 70% of this relevant market. The next largest competitor would possess less than 5% of the relevant market. The Merger would result in a post-Merger HHI of well over 2500, and an increase in concentration of well over 200 points. Post-Merger market concentration would be more than 4900, and would increase HHIs in an already concentrated market by well over 200 points. Thus, the Merger would result in concentration above the amount necessary to establish a presumption of competitive harm.

 

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Answer: One potential solution to address the concerns raised in this document...

ANTICOMPETITIVE EFFECTS: The Merger Would Eliminate Vital Head-To-Head Competition between Staples and Office Depot


The two companies are each other’s closest competitors. They are the two largest vendors of consumable office supplies to large B-to-B customers in the United States. The scale and capabilities of Staples and Office Depot are similarly matched, and are much larger and more robust than those of the next-largest vendor of consumable office supplies to large B-to-B customers (a regional office supplies vendor, W.B. Mason).
Staples’ and Office Depot’s size allows them to obtain products from manufacturers at lower prices than other vendors generally can. Both also offer a collection of distribution services that no other vendor of consumable office supplies can match: a national footprint with an extensive array of warehouses and distribution centers located across the country; correspondingly large salesforces; product breadth and depth, including private-label products; a single point of contact across all of a customer’s locations; a single user interface that connects to a customer’s procurement and billing systems; and other significant value-added offerings, such as order tracking, utilization reporting, and customizable catalogs.


The companies acknowledge that they are each other’s closest competitors. One of Office Depot’s own documents indicates that “[o]n a national scale, Office Depot’s competition is Staples.” Staples refers to itself as operating in a “2 player national market” and notes that “[t]here are only two real choices for customers.” 
They are often the first and second choices for large B-to-B customers of consumable office supplies, and predominantly win large B-to-B customers from, and lose large B-to-B customers to, each other.


Staples and Office Depot compete aggressively with each other on price and non-price terms to win and retain the business of large B-to-B customers. Staples and Office Depot frequently must compete with each other by lowering prices, increasing discounts or rebates, and providing significant cash incentives to win or keep large B-to-B customer accounts. 


Large B-to-B customers benefit from the competition between the two firms. Among other things, that competition enables customers to pit Staples and Office Depot against each other to obtain lower prices and better contract terms. Large B-to-B customers switch, or threaten to switch, their business from Staples to Office Depot, and vice versa, to obtain better prices, discounts, cash incentives, and other beneficial terms. There are many of examples of direct price competition between Staples and Office Depot for large B-to-B customers.  The Merger would eliminate this intense head-to-head price competition for large B-to-B customers. 
Staples and Office Depot also compete aggressively on non-price terms to win large B-to-B customers by offering high-quality services. They currently risk losing business to each other if large B-to-B customers perceive one company’s service as inferior or lacking. After the Merger, Staples would face substantially less competition for large B-to-B customers, and would have less incentive to improve, or even maintain, its current level of service to win or keep business.
Retail stores and internet websites directed at retail consumers are not viable alternatives for most large B-to-B customers. Such retailers cannot provide the level of pricing or service that office supplies vendors such as Staples and Office Depot provide and that large B-to-B customers require.
Wholesale suppliers of office supplies are not meaningful alternatives for most large B-to-B customers because wholesalers generally sell only for resale, not to businesses for their own use. Even when wholesalers work with independent vendors to distribute to customers, those wholesaler-vendor partnerships cannot provide the level of pricing or service that large office supplies vendors provide and that large B-to-B customers require.
Manufacturers of consumable office supplies are not a viable distribution option for most large B-to-B customers’ consumable office supplies needs. Given the breadth of office supplies large B-to-B customers buy, such customers would have to purchase from a large number of different manufacturers to cover their employees’ needs. Such purchasing would be highly inefficient, costly, and not practicable for most large customers. Moreover, manufacturers of consumable office supplies generally sell only in very large quantities, generally far larger than a B-to-B customer would purchase for its own use. As a result, manufacturers of consumable office supplies generally do not sell their products directly to customers buying for their own end-use and not for resale.
Other office supplies vendors, such as Amazon Business, regional vendors such as W.B. Mason, distribution consortia, and vendors of adjacent products, such as janitorial/sanitation products or breakroom supplies, generally have some combination of higher costs and thus higher prices, limited geographic footprints, and/or logistical and coordination challenges for large B-to-B customers. As a result, they would not meaningfully constrain Staples’ exercise of market power post-Merger.

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Answer: The proposed merger between Staples and Office Depot would eliminate v...

LACK OF COUNTERVAILING FACTORS

Barriers to Entry and Expansion

It is not likely that new entry or expansion by existing firms would be timely, likely, or sufficient to offset the anticompetitive effects of the Merger. A firm seeking to enter or expand in the market for the sale and distribution of consumable office supplies to large B-to-B customers, many of whom operate nationally or in multiple regions of the country, would face significant barriers to success.

One key obstacle to expansion by regional firms or consortia is having the geographic footprint to serve large B-to-B customers, many of which operate nationally or in multiple regions of the country. Creating a national distribution network anywhere close to that offered by Staples or Office Depot would be time and resource intensive.

Other vendors of consumable office supplies are many years and significant capital investments away from being in a position to replace the competition that Office Depot currently provides to Staples, even assuming those other vendors were likely to expand their geographic footprints.

Additionally, entrants must develop sophisticated IT systems that large B-to-B customers expect, to allow customized ordering systems that interface with the customer's procurement, billing, and utilization tracking systems. Such systems are costly to develop and maintain.

Large B-to-B customers also value having a relationship with an experienced sales representative that understands their particular needs. Thus, vendors seeking to enter or expand must recruit and hire a competent and experienced salesforce that can serve customers in multiple regions of the country. To hire enough sales representative to enter or expand on a sufficient scale to constrain the merged firm in multiple regions or nationally would take a significant amount of time and effort, particularly in light of noncompetition and non-solicitation agreements that incumbent vendors have with their employees.

Entrants also must overcome reputational barriers to entry and the companies' strong incumbency advantage. A significant percentage of RFPs are won by incumbent vendors-and often by Staples or Office Depot.

 

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