The Federal Trade Commission under the guise of protecting American consumers has spent the better part of a year and change attempting to block Whole Foods from merging with their biggest competitor Wild Oats. The FTC's complaint states:
Whole Foods’ acquisition of Wild Oats, as proposed, would violate Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended. Through the transaction, Whole Foods, the largest premium natural and organic supermarket chain in the United States, would acquire its closest competitor and longtime rival, Wild Oats. In each of the markets in which they overlap, Whole Foods and Wild Oats are each other’s closest substitute and compete in quality and prices, according to the Commission. After the merger, Whole Foods likely would be able to raise prices unilaterally, to the detriment of customers of premium natural and organic supermarkets.I don't know about you, but I feel safer knowing the FTC is protecting me from the evil multinational known as Whole Foods.
There are several interesting things to note about the complaint from the FTC I linked to above. The first I wanted to highlight is the uniqueness of the organic market used to justify the complaint. The FTC claims:
In defining the relevant markets, the Commission found that premium natural and organic supermarkets, such as Whole Foods and Wild Oats, are differentiated from conventional retail supermarkets in several critical respects. These include the breadth and quality of their perishables – produce, meats, fish, bakery items, and prepared foods – and the wide array of natural and organic products and services and amenities they offer.So the mutually agreed upon merger of Whole Foods and Wild Oats must be stopped because it is a niche market. Let's forget about all the other grocery stores in the area. You know, the ones that sell organic foods, but not exclusively. They would not fill any vaccum or cause Whole Foods to pause in any plans of price gouging.
The first court to hear the FTC's complaint denied them their injunction on the merger, but the Court of Appeals "relunctantly" in their words overturned the injunction. The district court ruled that the Organic markets was not a market at all just a portion of the overal grocery market and thus a merger was not a monopoly.
The majority decision for the appeal wrote about a fascinating remark by the FTC in their brief:
Inexplicably, the FTC now asserts a market definition isOf course in their initial complaint and cause for the injunction the market definition was the major reason to block the acquisition and therefore protect consumers from the monopoly. When this was rejected by the district court and further concurred by the appeals court the FTC said this market definition is not necessary. Without this market definition it is unclear how the FTC proposes they are protecting the American consumer.
It is a tad bit scary to think the FTC does not feel it needs to define a market before accusing a company of monopolizing that market.
Second is the SSNIP technique. It stands for small but significant non-transitory increase in price. What you do here is reason whether a monopolist could gain from the increase in price for a product. If there is a product that consumers will turn to in place of the one with the increased price, then that product must be conisdered a substitute and a part of the market.
This fits in by way of how both the FTC and Whole Foods used the SSNIP. The FTC claimed that "core customers" of organic grocery would simply switch to Whole Foods even with an SSNIP while Whole Foods argued marginal customers would simply shop elsewhere thus making the overal grocery market an alternative hence no monopoly.
The Appeals court ruled to overturn the district court on the grounds that anti-trust law can apply to core customers and not just the margins. The case is set to begin in February of this year. It remains to be seen what, if any, type of market definition is offered by the FTC to justify the case considering their claim that they don't need a market definition to justify injunctions for mergers.
Several worries arise from all of this.
1. If the existence of a grocery market with ready alternatives and possibility for an expanded organic market in those grocery stores does not count under SSNIP, then what can? There is no doubt that Whole Foods does not serve people in solitude. There are many available options for customers both marginal and core. This could pretty much destroy the SSNIP and make any buisiness merger questionable.
2. Wild Oats clearly was not competition in a real sense or Whole Foods could not have purchased them. Wild Oats as a business was losing to Whole Foods and it seems unclear how blocking the merger will protect customers if Wild Oats is already failing. At best it seems to kick the can down the road until Wild Oats goes out of business on its own accord. At worst it suggests the government will have to help failing businesses in a market where they have one competitor or at least stop them from selling to their competitor thus alleviating their economic burdens on the way out.
3. If the FTC says market definitions do not matter in an anti-trust case then a monopoly of a market is meaningless. Which we all know means it can mean anything that the FTC wishes it to mean. This is a government agency run amok. If there are viable alternatives then there can be no monopoly. In the case of Whole Foods, there is no reason to believe that they have a monopoly or that no other business in organic grocery could start up at anytime.