Office Superstore Case Study

1) How would you classify the office superstore industry? Who are the competitors? What are the characteristics of this industry that lead to this conclusion?

Today's office superstore industry in the United States provides a convenient one-stop shopping experience for small businesses and individuals with home offices. The main competitors in the industry are Office Depot, Staples, and Office Max. All of them offer a variety of office supplies, as well as computers, office furniture and other business related items.

Office Depot is the largest office superstore chain in the United States. Office Depot is first in total number of stores, first in average sales per store, first in average weekly store sales, first in total delivery sales and first in net earnings. Most importantly, Office Depot is the lowest price competitor among office superstore chains.

Staples is the second-largest office superstore chain in the United States; and the third major player in the office superstore industry is OfficeMax. The intense competitive rivalry between Staples and Office Depot turned to be quite beneficial for consumers. Both competitors had to reduce prices, introduce innovative approaches to marketing, distribution and store layout and expand into new areas of the country, bringing increasing numbers of consumers the convenience of one-stop shopping at low prices. Office Depot has been the most aggressive and lowest-price competitor, in turn forcing Staples and OfficeMax to compete more aggressively. Staples' office supply prices are the lowest in the cities where all three of the national office superstores (Staples, Office Depot and OfficeMax) compete. Prices are higher in markets where the only other competitor is OfficeMax and higher in those areas of the country where Staples faces no other superstore rival. Similarly, Office Depot charges significantly higher prices where it faces little or no superstore competition.

2) What barriers to entry help maintain the industry structure?

Current market realities indicate hardly any new entry even in the markets where prices are at elevated level. Over the past few years, the number of superstore chains has dropped. Office-1, which entered in 1991 and grew to thirty-five stores in eleven states by 1996, went bankrupt. Several other office superstores have exited the market altogether or have been acquired by one of the market incumbents. The fact that so many firms have exited and no one is trying to enter the market indicates significant challenges for any new entrants. In order to match the cost and distribution structures of existing players, a new entrant would have to establish presence at both, local and national levels. Effective competition in a particular local market requires a significant number of stores, however, in most areas, there's hardly any room for new stores. Staples, Office Depot, and OfficeMax each have approximately 500 stores nationwide and they continue expanding their network. Through some retailers such as Target, Wal-Mart, and Kmart, and computer superstores catering to small businesses, such as Best Buy do exist but repositioning by such retailers to attract office superstore customers is very remote and unlikely as these companies would have to significantly change their strategies to compete with Staples and Office Depot.

3) If the merger were to be allowed, how would you characterize the merged firm's own price elasticity in a geographic market that contained only that firm? How would this change over time?

An important aspect of a product's demand curve is how much the quantity demanded changes when the price changes. The economic measure of this response is the price elasticity of demand. If the merger between Staples and Office Depot were to be allowed, the demand for its products in geographic markets that contained only that firm would be very inelastic. The main reason is that there are only a few substitutes available in the market. Even if the merged firm significantly raises its prices, most consumers will still continue buying the firm's products due to the lack of competition. The only competition the merged firm would face in some areas is OfficeMax. Even though many other retailers sell office supplies, none of them offer the same variety and one-stop shopping convenience as office superstores do. The situation is unlikely to change over time due to high barriers of entry into the market, which will give the merged firm an opportunity to raise its prices annually and still keep customers coming back.

4) What is the relevant market for this case? Should retailers that sell, but do not specialize in office products, be considered as part of the market? What evidence supports this conclusion? What are geographic considerations?

A relevant market is defined as a market where "sellers, if unified by a hypothetical cartel or merger, could raise prices significantly above the competitive level". The main focus here is not whether other office retailers have anything in common with office superstores, but whether a sufficient number of customers will continue buying from them despite of significant price increases. The relevant market in the case includes only Office Depot, Staples, and Office Max in some areas. The proposed merger will most likely create a monopoly and significantly reduce competition. The evidence shows that even if the new monopolist