Tuesday, July 10, 2007

Whole Foods/Wild Oats Merger Creates “Enough Smoke to Suspect a Fire”: Antitrust Institute

Contrary to the views of many critics, the FTC has made a “highly compelling case for looking closely at whether a Whole Foods/Wild Oats combination will tend substantially to lessen competition,” according to an American Antitrust Institute “White Paper” issued July 7.

In the paper (“Whole Foods Proposed Acquisition of Wild Oats: The FTC Has Earned Its Day in Court”), Diana Moss writes that “there is enough smoke to suspect a fire.”

Rather than condemn the FTC, as many have already done, the public should await the results of the July 31 hearing on the FTC’s preliminary injunction before the U.S. District Court for the District of Columbia, Ms. Moss states.

The American Antitrust Institute (AAI) believes that there are at least three major issues that are worthy of investigation at the preliminary injunction hearing:

Product market definition: As has been pointed out by critics of the FTC’s complaint, the case turns on the definition of the relevant product market, described as “premium natural and organic supermarkets.” In 28 geographic regions across the country, Whole Food’s proposed acquisition of Wild Oats would eliminate the second largest competitor or potential competitor. However, if the relevant product market includes the natural and organic food products sold by full-line supermarkets, “the effect of the merger is de minimis.”

Pricing data. An analysis of the merging parties’ pricing data in relevant markets should be viewed as “complementary to the parties’ statements that the purpose of their merger is to avoid competition.” Much of the FTC case focuses on statements by Whole Foods CEO John Mackey, indicating a “clear desire to stifle competition.” However, “natural experiments,” using price data to determine if existing or potential competition discipline pricing by the merging parties, “should be viewed as a complement to anticompetitive motives . . .”

Elimination of potential competitor. The merger’s effect on eliminating a potential competitor deserves equal attention to the elimination of an existing rival in the relevant market. As CEO Mackey acknowledged, one of the motives behind the merger was to eliminate the single competitor that “has the scale and brand identity” that could serve as a “toe hold” for entry or expansion by a Whole Foods’ rival.

“Given the statements of Whole Foods’ Mr. Mackey, it is not surprising that the FTC would bring this case, although such statements are not necessarily determinative of the outcome,” observed Ms. Moss.

“And given the precedents such as Staples/Office Depot, in which close analysis of retail scanning data demonstrated that a narrow market definition makes good economic sense, the FTC deserves to have its day in court . . . "

Ms. Moss is Vice President and Senior Fellow of the American Antitrust Institute, an independent Washington-based non-profit education, research, and advocacy organization. According to the AAI, its mission is to increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy.

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