As a stockholder in Whole Foods -- and wannabe customer -- I am admittedly biased, but the FTC's decision to oppose the merger of Whole Foods and Wild Oats makes no sense to me. The FTC claims that Whole Foods and Wild Oats are both "premium natural and organic supermarkets." Whole Foods' CEO John Mackey responded to the FTC's complaint with a massive blogpost on the Whole Foods website. (How to win friends and influence regulators?) His main point is that Whole Foods competes with all supermarkets, not just with other "premium natural and organic supermarkets." With regard to that smaller market definition, Mackey observes:
Is there actually a separate category of "premium natural and organic supermarkets"? Let me state quite clearly up front that there absolutely is! However, that category actually consists of only one company-Whole Foods Market. We created the category and to-date we are the only company that actually belongs in it. Wild Oats, Earth Fare, and a few other companies have tried copying us in the past, but with very little historical success to actually show for it.
Ok, I am not sure that was very helpful to his cause, but you get the drift. In the end, the FTC's case seems to rest heavily on statements by Mackey about the purpose of the merger. In an email to his board of directors, Mackey listed as the top two reasons for the acquisition: "Elimination of an acquisition opportunity for a conventional supermarket" and "Elimination of a rival." So one big question in all of this is: how important is Whole Foods' intention?
In a white paper on the proposed merger, the American Antitrust Institute reasons:
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. Whole Foods' John Mackey has made a number of public statements regarding the motives for the merger. Some of these statements reflect legitimate objectives such as cost savings, but others reflect a clear desire to stifle competition. In light of this, "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 in developing evidence that the merger would tend substantially to lessen competition.
Over at TOTM, Geoff Manne bristles at the notion that pricing data is "complementary" to intent analysis:
If it is impossible to determine ex ante whether anticompetitive intent is just bluster, doesn't it rather more confuse than "focus" the likely effects of a merger? I get the presumption that "what one intends to happen, that is what is likely to happen." I just don't get why that presumption is ever actually warranted in a situation as complex as anticipating the likely effects of a merger.
Well stated.
For another interesting exchange about the relevance of Wild Oats' inability to obtain adequate financing, see the W$J letters from Arnie Celnicker (former FTC attorney) and Don Boudreaux (GMU economist). Good stuff.
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1. Posted by Brett McDonnell on July 11, 2007 @ 11:59 | Permalink
It seems to me that intent analysis is rather more defensible than that. I rather suspect that Mackey is at least as well able to predict the probable effects of the merger of his company as an economist or a corporate law scholar. It's not that I think the CEO is incredibly reliable, but he's likely to be no less unreliable than an economist's analysis of pricing data. The contrary presumption strikes me as a bit of academic hubris.
2. Posted by Geoff Manne on July 11, 2007 @ 15:38 | Permalink
Gordon: Thanks for the cite. My fuller analysis is available here and here and here, as well.
Brett: I'm not sure why you think intent analysis is defensible. In the first place, "intent" may in fact be nothing more that "hope." "Hope" expressed in strong terms really says nothing concrete about economic effect, and the likelihood that it will mislead substantially outweighs any probative value it might have. Second, when Mackey says something like "I intend to monopolize the premium organic foods market!" it may or may not bear relevance to the economically-relevant calculation the FTC should undertake. "Monopolize" to Mackey may mean something very different than "substantially lessen competition" under the Clayton Act or the Merger Guidelines. More important, Mackey's definition of the "market" almost certainly means something very different than the elasticity-determined definition required by economic analysis. The notion that one can infer anything economically meaningful from these sorts of statements is dubious.
As I said in the post Gordon quoted, I get the idea that an outcome may be more likely to occur (More likely than what, though? Than not? Than some unknown baseline? Maybe I shouldn't be so charitable.) if intended than if not intended. But that's not nearly enough to support using such potentially probative evidence. As with other forms of evidence, we certainly want its probative value to outweigh the likelihood of prejudice. Here that means if the evidence is likely to lead to Type II errors (as I believe this sort of evidence inevitably is) we should be wary of using it.
It may well be the case, as you suggest, that all available evidence to demonstrate likely anticompetitive effect ex ante is suspect. To me that does not suggest using the least bad evidence to make a case. To me that suggests that we don't have enough information to make these sorts of decisions accurately, so we shouldn't be making them at all.
3. Posted by CHA on July 11, 2007 @ 15:48 | Permalink
Thought this is more interesting behavior out of Mackey. The WSJ is reporting that for eight years , Mr. Mackey posted messages on Yahoo's stock forums under the ID Rahodeb. The name is an anagram for Deborah, the name of Mr. Mackey's wife. In these posts he spouted how great Whole Foods was and how terrible Wild Oats was.
4. Posted by Jake on July 11, 2007 @ 21:20 | Permalink
Anyone who thinks "intent" analysis has no probative value probably has never tried a case involving a complex commercial transaction.
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