The witch hunt is over.
Last evening, the FTC announced that it would drop its antitrust action against high-end grocer Whole Foods in exchange for the chain’s agreement to sell 32 stores and to give up the rights to Wild Oats’ name. FTC Chairman Jon Leibowitz proclaimed that “[a]s a result of this settlement, American consumers will see more choices and lower prices for organic foods” — you know, those ubiquitous food products that are available at, among other places, Wal-Mart and that the FTC insisted were not the focus of its Whole Foods challenge, which was purportedly aimed at protecting competition in the provision of grocery store formats, not particular types of products. Mr. Leibowitz also announced that the settlement of this surreal antitrust action “allows the FTC to shift resources to other important matters.” Can’t wait to see what those will be.
It’ll be interesting to see what happens to Whole Foods’ stock price now that it’s no longer a monopolist in the market for “premium natural and organic supermarkets.” Absent the ability to earn supracompetitive profits as a monopolist — a power that, according to the FTC, it has had since it consummated the Wild Oats merger in August 2007 — its expected free cash flows will certainly drop, as will its stock price. Maybe, though, it will actually fare better once it gives up its PNOS monopoly. Indeed, the company’s stock price (reflective of expected profits) has been badly battered since the company became a monopolist, falling from $44.26 when the monopoly was attained, to around $22 just before the D.C. Circuit initially reversed the trial court’s decision permitting the merger to proceed (July 2008), to $10-12 in the last few weeks (see chart here). While the overall stock market has fallen by about one half during this same period, Whole Foods’ drop is substantially steeper, and it began soon after Whole Foods attained its monopoly position, well before broader market’s drop. Maybe returning competition to the company’s market will actually improve the company’s lot.
Or maybe, as my co-blogger Geoff so eloquently put it, the notion of a separate market for premium natural and organic supermarkets is bulls**t. If that’s the case, then Whole Foods hasn’t been a monopolist, able to earn supracompetitive profits, since August 2007. If Whole Foods has actually been competing in a broader market, one that would include, say, this Safeway Lifestyle Store (and gazillions of other conventional grocery stores like it), then it’s battered stock price probably just suggests that consumers are turning away from its high-priced offerings and toward the same products that are available at the conventional grocery stores at which the vast majority of Whole Foods shoppers also shop.
So let’s see — which story makes more sense: that attaining a monopoly tends to drive one’s profits (and thus one’s stock price) downward, or that Whole Foods never actually had a monopoly because it faced vigorous competition from conventional grocery stores? Tough one.
Oh well. I’ll give the FTC some credit for tenacity. It’s pretty impressive that the Commissioners were willing to stand their ground in the face of evidence that Whole Foods wasn’t earning monopoly profits, that numerous grocery retailers are moving toward the Whole Foods format, that there are obvious economies of scale in grocery retailing (so that the combined Whole Foods/Wild Oats would have lower per unit costs), and that Whole Foods’ customers typically cross-shop at conventional grocery stores and could thus easily respond to any merger-induced increase in Whole Foods’ prices. (See here.) Why bother with real-world facts when you’ve got a handful of inflammatory emails?
So congrats on the victory, guys (and Ms. Jones Harbour). On behalf of the nation’s grocery shoppers, I’d like to thank you for protecting us from a premium natural and organic monopolist (and we just won’t worry about any economies of scale Whole Foods will sacrifice in order to comply with this consent decree).
On a personal note, I’d like to thank you for making my own job so much easier.
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Lol, I think I was thinking about a private bet rather than an agency decision rule or policy. I’m available via email for a wager offer.
Entity raised the issue of the financial performance of other high-end retailers, which he or she clearly thought was informative in that context, which prompted my series of questions about the probative value of other types of financial performance evidence. Its quite a stretch to make from that response the inference that it is MY position that we should *delegate* merger decisions to the stock market. Though given your description of the value of that data, there is no doubt that I find it more useful for enforcement purposes as a supplement to other types of analyses.
Thom says “As Antitrust Entity himself admits, grocery store customers seem to have jumped ship from Whole Foods, indicating that they perceive conventional grocery stores to be viable substitutes” and suggesting to Thom that other stores “should have been included in the relevant market.” I disagree. My hypothesis was that the demand curve shifted down because of the recession. If that’s the reason profits and the stock price fell, the change in profitability or equity valuation provides no information as to the elasticity of demand (as to whether buyers view other store formats as substitutes), and hence no information from which to define a market. (If an attempt to exercise market power by raising price is instead made unprofitable by virtue of buyer substitution — Thom’s theory — that would indeed reveal an elastic demand and suggest broadening the market. But that’s Thom’s original hypothesis, not the alternative I proposed that he claims that the stock evidence rebuts.)
As for Josh’s question, I find it hard to imagine any type of profitability evidence or evidence from stock price changes that would affect my view as to the competitive effects of the Whole Foods/Wild Oats merger given what has happened to the economy since. I am also generally skeptical of using event study evidence to make decisions as to the likely competitive effects of merger in any individual case (though a little more sympathetic to using that evidence to evaluate mergers generally or on average). If Josh thinks that the antitrust enforcement agencies or the courts should delegate their decision-making to the stock market, I would be interested in reading his blog post defending that position.
This debate about the sufficiency of evidence necessary to update priors in one direction or another is interesting and relates back to our Sirius/XM discussion that antitrust entity raised.
Antitrust entity writes that it is necessary (even in a blog post?) to “necessary to rule out the alternative theory before inferring from the declining stock price that the company never had market power?” On the other hand, Thom writes that even without a full blown regression analysis rejecting alternative hypothesis (and thats all we can do right? not actually “rule them out”), the evidence is more consistent with one theory than another given that customers have fled WF in response to a negative income shock that amounts to an increase in price.
Much of this is about priors, isn’t it? If one believes that the anticompetitive theory is the best explanation of the merger before the new observation, evidence that is at least plausibly consistent with both theories is going to be unlikely to budge the prior that the merger is anticompetitive. If one’s prior is that the merger is efficient, evidence that is at least facially inconsistent w. the anticompetitive theory (though plausibly consistent after controlling for things, etc.) is likely only to bolster the prior.
My discussion of this issue drew the ire of some commentators during the Sirius-XM bankruptcy discussion. My point then was that the observation of the bankruptcy may not rule out alternative theories but, in my view and without doing the full blown analysis, the post-merger observation (on the margin) reduced the likelihood that the anticompetitive theories explained the merger. Some readers mistakenly (though perhaps fairly given my inarticulate drafting in the post) presumed that belief that some new observation makes one theory more plausible than the other is analytically identical to “ruling out” another — or in the extreme, proposing a legal test that equates post-merger bankruptcy with antitrust immunity.
Perhaps we need better data here. So, I’ll ask the same question that got me in trouble with commenters last time, if this evidence is insufficient to adjust your prior beliefs concerning the anticompetitive theories, what would be adequate? Surely this depends on the strength of the prior — which in turns depends on the publicly available evidence (which I believe suggests a close call on the pricing evidence). What about evidence that WF stock dropped more than some index of other luxury retailers who target similar consumers (controlling for other factors, etc.)? Evidence that rivals stock prices fell when the district court allowed the merger and increased when it was enjoined?
Antitrust Entity is certainly correct that one would need to control for all sorts of things before drawing any sort of definitive conclusion from changes in stock price. No, I did not do so before writing this blog post. I have outlined numerous times why I believe the FTC’s characterization of Whole Foods’ market was too narrow. I won’t repeat those here. (Interested readers can search on “Whole Foods” for numerous posts by me and Geoff on the market definition issue. I’d also point folks to my article in Regulation magazine.)
I point to the stock price only because it seems inconsistent, at least on first glance, with the FTC’s claim that Whole Foods became a monopolist in August 2007. Monopolists usually earn supracompetitive profits as they reduce output, leading to an increase in prices. Of course, a reduction in one’s output can drive up one’s market-clearing prices only if one’s customers do not have ready alternatives. As Antitrust Entity himself admits, grocery store customers seem to have jumped ship from Whole Foods, indicating that they perceive conventional grocery stores to be viable substitutes. That may explain why Whole Foods’ profits (and stock price) have fallen, as Antitrust Entity states, but it also suggests that Whole Foods is not a monopolist. After all, people have to buy groceries somewhere. If they’re not buying them from Whole Foods, they’re turning to some other source — most likely conventional grocery stores. That suggests that Whole Foods does face susbtantial competition from those stores, which should have been included in the relevant market.
Her’s a little evidence: “For the first time in its history, Austin-based Whole Foods Market Inc. reported a quarterly decrease in same-store sales, a key barometer of a retailer’s success.” From a Feb. 19, 2009 news story at http://www.statesman.com/business/content/business/stories/other/02/19/0219wholefoods.html. A graph accompanying the story shows the change in same store sales positive and trending upward during 2007 but trending steadily downward from 2008:I. Another figure shows that quarterly profits, while always positive, have for several years been lower every quarter than the corresponding quarter during the previous year. This evidence appears to be consistent with both Thom Lambert’s theory that competition has grown more intense and with the alternative theory that the company could possess market power but has been hurt by the recession. Which reinforces my original question: isn’t it necessary to rule out the alternative theory before inferring from the declining stock price that the company never had market power?
I shop at Whole Foods. And Trader Joe’s and Safeway. They all sell organic foods. There is tremendous overlap in what they sell and I buy the products I want where they are the cheapest.
The FTC Commissioners should get out more and shop instead of letting their illegal immigrant nannies (that they don’t pay FICA taxes on) do all the buying.
“While the overall stock market has fallen by about one half during this same period, Whole Foods’ drop is substantially steeper, and it began soon after Whole Foods attained its monopoly position, well before broader market’s drop. … So let’s see — which story makes more sense: that attaining a monopoly tends to drive one’s profits (and thus one’s stock price) downward, or that Whole Foods never actually had a monopoly because it faced vigorous competition from conventional grocery stores? Tough one.” I interpret this language as inferring that Whole Foods could not have market power (contrary to what the FTC claims) from the observation that Whole Foods’ stock price has declined more steeply than the stock market as a whole. Here’s a competing hypothesis about the stock price. Whole Foods (with its “Whole Paycheck” image) is perceived as something of a luxury retailer, and in consequence the demand for Whole Foods’ products is more sensitive to the business cycle than that of most firms. (This is just a conjecture, but consistent with this view, same store sales at high-end department stores like Neiman Marcus are way off compared with last year while sales at Wal-Mart are up.) If Whole Foods is experiencing a sharp decline in demand, that would likely drive down both profitability and the stock price, holding constant whatever market power the firm possesses. (It is even possible that the recession has driven off customers with the most elastic demand, so that Whole Foods’ post-merger market power has increased as its profits fell.) In the long conversation last month about what can be inferred about the market power explanation for merger from XM Sirius’s near-bankruptcy, Josh wrote “Its trivially obvious to know that one actually doing the [retrospective] analysis [of profitability] would want to be careful to control for all sorts of things.” My question for Thom Lambert is whether he has controlled for “all sorts of things,” including my conjecture about the sensitivity of demand for the company’s products to the recession, before concluding that the decline in Whole Foods’ stock price provides an appropriate basis for questioning the FTC’s market power allegation.