1. Unilateral Effects Case Study: The Whole Foods/Wild Oats Merger
Competition Commission of India
October 25-26, 2010

2. I. Introduction Background to the Merger
Whole Foods Market (WFM) and Wild Oats (WO) were national supermarket chains selling organic and natural foods
WO was in financial difficulty
WFM sought to acquire WO
FTC alleged that WFM and WO competed “head to head” in 21 geographic markets and claimed that the merger would create a monopoly in “premium natural and organic supermarkets” in nearly all of those markets
Wild Oats
Whole Foods
Store Locations

3. I. Introduction Key Antitrust Issues
Did WFM and WO constrain each others’ prices to such a degree that the merged firm would be able to profitably raise prices without fear of significant customer diversion to “conventional” supermarket chains?
Central issues
Product market definition / direct evidence of effects
FTC alleged market was “premium natural and organic supermarkets”
In a broader product market, WFM and WO had very small shares (usually <5%)
Consumers’ willingness to switch to “conventional” supermarkets
FTC contended there were many “core customers” who would not switch
Parties contended that most consumers cross-shop and many would switch, and that price discrimination against remaining “core customers” was infeasible
Ease of repositioning, expansion and entry
FTC argued supply responses would be unlikely, untimely and insufficient
Parties pointed to many examples of repositioning and entry, and event study analysis

4. II. Product Market Definition FTC’s Argument and Analysis
Product market is “premium natural and organic supermarkets” (PNOS)
WFM, WO and a very few local niche competitors
Qualitative evidence
WFM and WO stores looked most alike among all competitive alternatives
WFM tended to located its stores in close proximity to WO
Internal documents reflecting historical rivalry
Testimony from WFM CEO downplayed competition from “conventional” chains
Testimony that merger would avoid “nasty price wars”
Empirical evidence
When a WFM store opened near a WO, it took substantial sales away from WO
Generally supported by WFM’s internal analyses
WFM margins generally higher than “conventional” supermarkets’ margins
WFM margins tended to be lower in markets with a WO store present
FTC did not attempt formal SSNIP test, favoring Staples approach primarily focused on margins analysis (and qualitative evidence)

5. II. Product Market Definition Parties’ Argument and Analysis
Product market includes multiple other competitors — conventional supermarkets, specialty food retailers, club stores, mass merchants
Qualitative evidence
Conventional chains carried many of the same products
Internal business documents recognize competition from non-PNOS supermarkets
WFM regularly price-checked conventional supermarkets
WFM tracked entry and store remodeling by conventional supermarkets
Empirical evidence
Price analyses showed uniform regional pricing by WFM and WO: prices did not seem to vary based on WO’s presence or absence
Event studies showed no evidence of significant price responses following WFM store openings and WO store closings
Parties contrasted absence of direct price effects evidence with Staples case to argue market was much broader than PNOS

6. II. Product Market – Direct Effects Evidence Event Study Analysis
Natural experiments
Entries of WFM stores near existing WO stores and exits of WO stores near existing WFM stores
Opening a WFM store should have little effect on WO if WO’s pricing was already constrained by conventional supermarkets and great effect if it was not
Closing a WO store should have had little effect on WFM if conventional supermarkets constrained WFM’s pricing and great effect if they did not
Compare average weekly prices paid by shoppers for thousands of grocery items sold by WFM and WO before and after the entry and exit events
Compare before vs. after prices on an item-by-item basis

7. II. Product Market – Direct Effects Evidence Price Change Comparison, Wild Oats Exits
Source: Whole Foods Market

8. II. Product Market – Direct Effects Evidence Price Change Comparison, Whole Foods Entry
Source: Whole Foods Market

9. II. Product Market Definition Discussion Issues
How useful / informative is market definition in a highly differentiated product merger?
Should direct evidence of competitive effects be viewed as a substitute or complement to formal market definition?
What are the risks to defining the market unduly narrowly – e.g., PNOS rather than “all supermarkets”?
How should quantitative evidence (data) vs. qualitative evidence (documents, testimony) be weighed and reconciled when they appear to be at tension?

10. II. Product Market – Direct Effects Evidence Further Readings
Carlton Varner and Heather Cooper, “Product Markets in Merger Cases: The Whole Foods Decision,” Antitrust Source October
Jonathan B. Baker and David Reitman, “Research Topics in Unilateral Effects Analysis,”
FTC Unilateral Effects Analysis and Litigation Workshop, February 12, 2008 transcript

11. III. Consumers’ Willingness to Switch FTC’s Argument and Analysis
WFM and WO marketed themselves to a core clientele
“Core customers” would not switch to non-PNOS competitors
Products and services were highly differentiated
Even if many consumers would switch, core customers would be subject to price discrimination
Higher prices?
Reduced shopping convenience?

12. III. Consumers’ Willingness to Switch Parties’ Argument and Analysis
Parties contended that consumers cross–shop widely
WFM and WO documents
Consumer survey findings
Observations from the real world
No identifiable mechanism to price discriminate against “core” customers
Conditions to support price discrimination were absent
“Critical loss analysis”
Calculate minimum loss of sales needed to make a post-merger price increase unprofitable
Qualitative evidence on whether “enough” consumers would switch or divert their purchases to make the price increase unprofitable

13. III. Consumers’ Willingness to Switch Issues for Discussion
Who defines the relevant market – the core customer or the marginal customer?
The marginal customer determines price, absent price discrimination
The marginal customer defines the boundaries of the market, absent price discrimination
What needs to be proven to support price discrimination markets?
Identify targeted buyers with inelastic demand
Charge higher prices to targeted customers
Prevent re-sale (arbitrage) from low-price to high-price buyers
Prevent customer diversion to substitute products

14. III. Consumers’ Willingness to Switch Further Reading
Sumanth Addanki and Alan J. Daskin, “Who Defines the Relevant Market – The Core Customer or the Marginal One?,” NERA Antitrust Insights, Summer
Charles J. Biggio, “Whole Foods’ Impact on Unilateral Effects,” Global Competition Policy, September

15. IV. Repositioning, Expansion and Entry FTC’s Argument and Analysis
Barriers to supply-side responses
Reputational barriers
Conventionals would need to “abandon” their own “core” customers
WFM/WO “core” customers would not switch
Likelihood, timeliness, sufficiency
Unlikely – see above
Not timely – reputational barriers?
Insufficient – past examples were limited and did not elicit significant responses from WFM or WO
Elasticities should already reflect the effects of repositioning on the likelihood of a unilateral post-merger price increase

16. IV. Repositioning, Expansion and Entry Parties’ Argument and Analysis
No barriers to supply-side responses
Competitors had strong motive and means to enter/expand
Uncommitted entry was feasible
Multiple significant entries had taken place and were ongoing
Conventional stores’ private labels
Stores within a store
New store concepts and banners

17. IV. Repositioning, Expansion and Entry Empirical Analysis
Direct effects evidence also can come from analyzing other events – entries, expansions, repositioning by competitors alleged to be outside of the product
Supply-side responses by non-market participants should not affect prices by firms within the alleged market
Event studies
Conventional entries and remodelings affected WFM and WO prices ―oftentimes by more than WFM entries and WO exits

18. IV. Repositioning, Expansion and Entry Issues for Discussion
How high are the evidentiary hurdles to assess likely, timely and sufficient supply responses?
How probative are case examples of past entry?
How should the possibility of post-merger repositioning by the merging firms be factored into the unilateral effects analysis?

19. IV. Repositioning, Expansion and Entry Further Reading
Peter Boberg and John Woodbury, “Repositioning and the Revision of the Horizontal Merger Guidelines,” Antitrust Source December
Amit Gandhi, Luke Froeb, Steven Tschantz and Gregory J. Werden, “Post-Merger Product Repositioning,” Journal of industrial Economics 2008

20. V. Relevant Case Materials Further Reading
Complaint
FTC’s economic expert reports
District Court opinion
Court of Appeals opinion