Froeb on Economics in Whole Foods

Josh Wright —  30 August 2007

Here’s a taste of the reaction of former FTC Bureau of Economics Director Luke Froeb to some of the economic analysis in the recent Whole Foods merger case:

The heavily redacted court documents refer to entry “experiments” to determine the degree of substitution between the two merging stores. We found the following on the Whole Foods website,

If we [close the Wild Oats Store right across the street], we believe approximately 50% of the volume their store does will transfer to our store, with the other 50% migrating to our other competitors (these estimates are based on our past experience with similar situations).

It is hard to believe that the diversion ratio could be this big. But if it is, then simple models of competition would predict a big enough post-merger price increase to put the two stores into a relevant market by themselves.

Go read the whole thing here. There are links there to the relevant public (redacted) versions of the expert reports.

One response to Froeb on Economics in Whole Foods

    market failure, right here 31 August 2007 at 7:05 am

    The thought experiment doesn’t really add that much–in urban settings, where people walk for grocercies, of course you’d have a high diversion ratio if you closed the grocery store next door. But that doesn’t mean they’re substitutes in a meaningful sense.

    I lived in DC for awhile, next to a new Whole Foods, and it put the neighboring Mexican grocery store out of business. It doesn’t mean that they’d necessarily be in the same “market” when choosing to locate new stores. I can’t imagine that Whole Foods ever would have opened a new store right next to a Wild Oats.

    The concern I have is the monopsony problem–there aren’t many organic farms, and the merged Whole Foods/Wild Oats entity could squeeze them much harder. I don’t care so much if some yuppies pay $.30 more for their shiraz.