It appears that the FTC is moving to stop the proposed Whole Foods/Wild Oats merger.Â Says the FTC:
If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers [in the premium natural and organic supermarkets market]. That is a deal consumers should not be required to swallow.
Very punny.Â I’d be laughing hysterically if I didn’t find this conception of market definitionÂ ludicrous almost beyond belief.Â I haven’t seen anything so absurd since the allegation (by the reliably-interventionist AAI, at least; not theÂ DOJ) that front- and top-loading washing machines are in different markets.
I would think that the triumphant entry of Wal-Mart alone into the natural and organic foods market (ooh–but not premium natural and organic! Some people just won’t buy their pesticide-free bok choy at Wal-Mart, you know) would save this merger.
But notice something important.Â The FTC doesn’t claim that the relevant market is the market for natural and organic food.Â The market is for natural and organic supermarkets.Â The agencies have been down this road before, mistaking channels of distribution for relevant markets.Â On the same grounds it stopped the Libbey/Anchor-Hocking mergerÂ and the Staples/Office Depot merger,Â to say nothing of a number of other grocery store mergers.Â Now, in some cases, it may be that the market is definedÂ by the merging distributors (asÂ many would say was true in the Staples case).Â But because economically-relevant market definition turns onÂ demand elasticity among consumers whoÂ are often free to purchaseÂ products from multiple distribution channels, a myopicÂ focus onÂ a singleÂ channel of distributionÂ to the exclusion of others is dangerous.
In other words, there is a serious risk of conflating a “market” for business purposes with an actual antitrust-relevant market.Â Whole Foods and Wild Oats may view themselves as operating in a different world than Wal-Mart.Â But their self-characterization is largely irrelevant.Â What matters is whether customers who shop atÂ Whole Foods would shop elsewhere for substitute products if Whole Food’s prices rose too much.Â The implicit notion that the availability of organic foods at Wal-Mart (to say nothing of pretty much every other grocery store in the US today!)Â exerts little or no competitive pressure on prices at Whole Foods seems facially silly.Â Â
Market definition is thorny, and it has (unfortunately) become the end point, rather than the starting point, of merger analysis at the agencies.Â I don’t know what aÂ hard look at the data would show in this case, but my strong suspicion isÂ that theÂ FTC is choking on its organic, locally-grown edamame with this one.Â Â
(By the way–for an extended meditation on these issues, see my article with Marc Williamson, Hot Docs vs. Cold Economics).