Case on Homedepot

1. Staples and Office
Depot 1997 Case Study
MBA 525 R2
Prof. Bosu Seo
Group No 2

2. Summary of Case Study
Office superstore and its market: The office superstore is the kind of store that sell
office products for small and individual business; the market office superstore is an
oligopoly with only three competitors in the USA including Staple, Office depot, and
OfficeMax.
Staples: Second largest office superstore chain in the USA with half of its revenue
from office supplies sales.
Office Depot: Largest office superstore chain in the USA with the ability to set up a
competitive low price than its competitors while making profits.

3. What happened in the case study?
Staples wanted to merge with OfficeDepot in order to eliminate its biggest
competitors once and for all.
The government is worried about the potential damage that comes from the
merger because it might hurt the overall office superstore market, the
competition within it, and the customers’ benefits.

4. Reasons---the government wants to stop the
merge
They might rise their price when there is no competition.
It will hurt consumers as well.

5. Classification of Office Superstore Industry
● Product Range
● Consumer and Business Focus
● National and International Presence
● Competition
● Economies of Scale
● Online Presence
● Technology Integration
● Regulatory Scrutiny

6. Competitors of Office Superstore Industry
OfficeMax was a significant rival for both Staples and Office Depot in the office superstore
sector in 1997, when a merger between the two companies was being considered. The top
three companies in the retail office supply market were Office Depot, OfficeMax, and Staples.
Each of them catered to both individual consumers and businesses, operating large retail
stores across the country.
The fierce competition between these big office superstore chains at the time defined the
competitive environment. Offering a wide range of office products and services, competitive
pricing, and easily accessible locations, each company aimed to gain a larger portion of the
market. Due to the planned merger of Staples and Office Depot, there were worries about
possible anti-competitive effects as there would have been fewer significant players in the
market.
It's important to remember that as e-commerce has grown, market conditions have changed,
and customer preferences have changed over time, all of which have affected the competitive
dynamics in the office supply industry.

7. Characteristics of this Industry
● Limited Number of Dominent Player
● Product Assortment
● Price Competition
● National Presence
● Customer Base
● Economies of Scale
● Supplier Relationships
● Technology and Innovations

8. The Barriers to Entry
● Nationwide Presence Requirement:
○ Establishing a nationwide presence is crucial for new entrants due to the existing
incumbents (Staples, Office Depot, OfficeMax) having a nationwide network of
500 or more stores. This requirement significantly raises the barrier to entry,
demanding a widespread geographical reach right from the start.
● Scale-Dependent Cost Advantages
○ The large-scale operations of established firms allow them to negotiate
better prices with suppliers due to their substantial purchasing volumes.
This cost advantage is a significant entry barrier for newcomers who lack
the same purchasing power.
● Efficient Distribution Networks
○ Established firms benefit from highly efficient distribution networks built
over time. They optimize distribution by utilizing regional transshipping
centers, enabling quick and cost-effective movement of products. New
entrants would need to match or surpass this efficiency, posing a
considerable challenge.

9. The Barriers to Entry
● Nationwide Cost Structure
○ To compete effectively, new entrants would need to replicate the efficient cost
structure of existing superstore firms on a national level. Achieving such cost
efficiency across multiple geographic areas requires substantial initial investments
and operational expertise.
● Multiple Store Requirements
○ Entry at a national level necessitates opening multiple stores across various
geographic regions. Each new market entry requires substantial effort,
investment, and local market understanding, making the process exponentially
complex and costly.
● Geographic Market Entry Hurdles
○ Entering numerous local markets on a national scale poses formidable challenges.
Each market has its unique characteristics, competitive landscape, and consumer
behaviors, magnifying the difficulties for new entrants attempting to establish a
presence.

10. In summary, the barriers highlighted in the provided sentences revolve
around the necessity for a nationwide presence, the advantages of
economies of scale, the complexities of establishing an efficient
distribution network, and the extensive challenges associated with
entering multiple local markets simultaneously. These collectively
form substantial barriers to entry for potential newcomers in the
office superstore industry.

11. Price Elasticity in a Geographic Market
Containing Only that Market
Based on the FTC's argument, if the merger
reduces competition, the merged firm may have
more pricing power, resulting in lower price
elasticity
(consumers being less responsive to price changes).
Prices higher where they do not compete, and
lower where they are rivals

12. Price Elasticity Over Time in Staples-Office
Depot Merger
Immediate Impact:
Limited change initially.
Consumer perception might not immediately shift.
Post-Merger Integration:
Cost efficiencies could influence elasticity.
Pass-on savings to consumers may stabilize elasticity.
Market Dynamics:
Competitors' reactions will play a crucial role.
Entry of new players may maintain or increase
elasticity.
Regulatory Influence:
Regulatory conditions may impact pricing.
Scrutiny can act as a check on pricing practices.
Market Saturation:
Saturation may increase elasticity.
Limited growth opportunities affect sensitivity.
Innovation and Differentiation:
Unique offerings can impact elasticity.
Added value may reduce overall price
sensitivity.

13. Relevant Product Market
The group or category of products that, in practice, consumers believe can easily be
substituted for one another, based on product characteristics, price and use.
Ex: Consumers can easily substitute a mint-flavored toothpaste, with a cinnamon flavored
toothpaste
“Office Supplies through Office Superstores”
- broad range of office supplies
- maintain a huge inventory
- lets consumers do one-stop shopping

14. Geographic Market
The area to which consumers can practically turn for alternative sources of the product.
Key considerations
- 42 metropolitan areas
- Commerical realities tests
- Local advertising practices
Other Retailers?
- should not be considered as part of the office superstore market.
- No unique combination of price, convenience, and product offerings
- The cross-elasticity demand between office superstores and other retail
sources of office supplies is low (the way that changes in the price of one
good can affect the quantity demanded of another good)

15. Argument 1 - Product Market Scope
-They argued that the market could include more than only
office superstores.
-Inclusion of mass merchants, warehouse clubs, computer
stores, mail order companies, and independent dealers.
-Customer flexibility in product choice and consumption.

16. Argument 2 - Geographic Market Definition
-Argument for a larger or national
geographic market scope.
-Importance of customers’ ability to shop
in different locations.
-Critique of FTC’s focus on physical store
locations.

17. Argument 3 - Merger Efficiencies
-Expected efficiencies with lower purchasing costs, reduced overhead and improved
distribution.
-Benefits to consumers through lower prices.
-Enhanced competitiveness with larger retailers.

18. Argument 4 - Divestiture Proposal
-Proposal to divest numerous locations to
OfficeMax.
-Aim to create a viable competitor post-merger.
-Effort to address FTC’s anticompetitive
concerns.

19. Conclusion
● A negative impact on competition and prices in the office supplies market.
● The elimination of head-to-head competition between Staples and Office
Depot would free the merged entity to charge higher prices.
● Result in a significant increase in market concentration, potentially leading
to anticompetitive pricing.
● Geographic markets affected by the merger include many populous cities,
where the number of office superstore competitors would be reduced or
eliminated.

20. Thank you!