FTC v. Staples, Inc.

In 1996, Staples Inc. and Office Depot, two of the most significant office supply retail chains in the United States, announced a proposed merger valued at approximately $4 billion USD. Both companies operated nationwide networks of large-format superstores, specializing in office products and business supplies. The companies presented the merger as a means to enhance efficiency and lower costs, enabling them to better compete in a rapidly evolving retail market.

At the time, the office supply industry was highly concentrated, with Staples, Office Depot, and OfficeMax representing the major national players. The proposed merger raised concerns that it would significantly reduce competition in many local markets, particularly in cities where Staples and Office Depot were the only two superstore options available.

In response to these concerns, the Federal Trade Commission (FTC) launched an investigation and filed a lawsuit to prevent the merger from moving forward. The case, which would become a pivotal decision in modern U.S. antitrust law, centered on how competition should be defined in the retail office supply market and the potential harm to consumers resulting from reduced price competition.^[1]

In the mid-1990s, the office supply industry in the United States was dominated by three major retail chains: Staples Inc., Office Depot, and OfficeMax. These companies operated large-format "superstores" that sold a wide range of office products at discount prices, competing primarily on price, selection, and convenience. As competition intensified and profit margins shrank, Staples and Office Depot announced plans to merge in September 1996 in a deal valued at approximately $4 billion.^[1] Both companies presented the proposed merger as a strategic consolidation aimed at achieving greater efficiency and lower costs through economies of scale.^[1]

However, the Federal Trade Commission (FTC) viewed the merger as a potential violation of Section 7 of the Clayton Act, which prohibits mergers or acquisitions that may substantially lessen competition or tend to create a monopoly.^[1] The FTC launched an investigation and, in March 1997, filed a lawsuit in the United States District Court for the District of Columbia seeking a preliminary injunction, which was granted in by U.S. District Judge Thomas F. Hogan, to block the merger.^[1]

At the heart of the FTC's case was the concern that the proposed merger would result in significantly higher prices for consumers, especially small and mid-sized businesses that relied on office supply superstores. The FTC identified dozens of metropolitan areas across the United States where Staples and Office Depot directly competed, arguing that the merger would reduce the number of major competitors from three to two, or even from two to one in some local markets, leading to anticompetitive effects. In response, Staples and Office Depot argued that the FTC was using an overly narrow market definition. They claimed that the relevant market should encompass all sellers of office supplies, including mass retailers such as Walmart and Target, as well as mail-order companies and emerging online businesses. The companies also contended that the merger would result in substantial cost savings that could be passed on to consumers.^[1]

The FTC v. Staples, Inc. case played a pivotal role in shaping how federal antitrust agencies approach merger enforcement. It highlighted key principles from the Federal Trade Commission's modern analytical framework, particularly those outlined in the revised Horizontal Merger Guidelines.

A central focus of the case was the theory of unilateral competitive effects. This theory examines how a merger between companies offering similar, yet not identical, products can reduce competition even in the absence of coordinated behavior. In evaluating the Staples–Office Depot merger, the FTC emphasized that both companies treated each other as their primary competitors, and the removal of one would likely lead to higher prices in overlapping markets.^[2] The case also marked a significant use of econometric evidence in merger litigation. FTC economists presented data showing that Staples' prices were substantially lower in cities where Office Depot operated nearby. Statistical analyses suggested that the merger would lead to price increases of approximately 5% to 10% in markets where both chains previously competed, reinforcing the agency's claims of potential consumer harm.^[2]

Efficiencies claimed by the merging firms were another area of focus. While Staples and Office Depot argued that the merger would lead to cost savings, the court found that many of these claims lacked sufficient documentation or were not directly related to the merger.^[2] The court's treatment of these claims aligned with the Merger Guidelines' approach, which places the burden on merging firms to prove that efficiencies are both merger-specific and verifiable. The court also addressed whether new entrants could offset any anticompetitive effects of the merger. It concluded that entry by other competitors, such as warehouse clubs or mass retailers, was unlikely to occur quickly or at a scale sufficient to restore competition.^[2]

The Federal Trade Commission, an independent agency responsible for enforcing antitrust and consumer protection laws in the United States, played a central role in challenging the merger. The FTC argued that the proposed deal would lead to a substantial lessening of competition in numerous geographic markets, potentially resulting in higher prices and fewer choices for consumers and businesses.^[1]

The Commission relied on economic data, internal company documents, and market analysis to support its case. In 1997, the FTC filed for a preliminary injunction in federal court to block the merger under Section 7 of the Clayton Act.^[1] The court ultimately ruled in favor of the FTC, marking one of the agency’s most notable enforcement actions of the decade.

In FTC v. Staples, Inc., presided over by U.S. District Judge Thomas F. Hogan, the Federal Trade Commission argued that the proposed merger between Staples and Office Depot would significantly reduce competition in the market for consumable office supplies sold through office superstores. According to the FTC, this would violate Section 7 of the Clayton Act, which prohibits mergers that may substantially lessen competition or tend to create a monopoly.^[3] The Commission held that the relevant product market consisted specifically of office supplies sold through dedicated superstores, such as Staples, Office Depot, and OfficeMax, to small businesses and home offices. It stated that these superstores operated in a distinct retail category, offering a particular combination of selection, price, and convenience that other retailers, such as mass merchandisers or local dealers, could not match.^[1]

To support its case, the FTC presented pricing data, company documents, and expert economic analysis, showing that prices tended to be lower in areas where Staples and Office Depot directly competed. The agency emphasized that if the merger were allowed, competition in many local markets would be reduced to just one or two firms, increasing the risk of higher prices for consumers. The Commission also presented evidence of past behavior, indicating that both companies adjusted their pricing strategies in response to the presence of nearby competitors. This suggested that removing one of the major players from the market would reduce the pressure to keep prices low.^[1]

Staples and Office Depot opposed the FTC's claims, arguing that the market was broader than the Commission described. They contended that consumers frequently purchased office supplies from a wide range of sources, including discount retailers, warehouse clubs, online vendors, and independent dealers. According to the defendants, this broader range of competition limited the ability of any single company to raise prices, even in areas where superstores were few. They also argued that the proposed merger would create operational efficiencies that would ultimately benefit consumers. These efficiencies, they claimed, would lead to potentially lower prices, rather than higher ones.^[1]

The defense further pointed out that Office Depot had begun to struggle as a standalone business and that the merger would allow it to remain viable in the long term. Expert testimony presented by the defendants suggested that the transaction would help both companies stay competitive in a challenging retail environment. Ultimately, however, the court found the FTC's evidence more persuasive and concluded that the merger posed a real threat to competitive pricing in many local markets.^[1]

The defense expressed concerns about the majority’s decision to block the merger, emphasizing the potential benefits the combination could bring to the market and consumers. They argued that the defendants’ broader view of the market was more realistic, highlighting that office supplies are available through many channels beyond superstores. This variety, the defense claimed, would continue to provide competitive pressure even after the merger.^[1]

Additionally, the defense raised concerns about the potential for anti-competitive price increases resulting from the merger. It questioned the FTC’s reliance on local market concentration as a sole indicator of harm without sufficiently considering the overall competitive landscape and consumer behavior.^[1] They also gave greater weight to the efficiencies the merger would generate, arguing that the cost savings and operational improvements could translate into lower prices and better services for consumers. Moreover, the defense expressed concern that the preliminary injunction would harm Office Depot’s viability, potentially reducing competition in the long run. It viewed the ruling as potentially punishing successful innovation and growth that had benefited consumers over time.^[1]

The FTC v. Staples case is significant because it demonstrated that large companies can be prevented from merging if the merger may reduce competition and result in higher prices for consumers. The court focused on how the merger would affect local markets, where many cities would go from having two or three office supply superstores to only one or two. This could lead to less price competition and harm to shoppers. The case also showed how courts use preliminary injunctions to pause big mergers while the government investigates further. That way, companies can’t merge and make big changes that would be hard to undo later. The court made it clear that protecting competition for the public matters more than the short-term financial losses a company might face if a deal is blocked.^[1]

Finally, the case was one of the first big antitrust challenges to a merger between two “superstores,” or category-killer retailers. It sent a message to other companies that even if a merger could lead to cost savings, it still might not be allowed if it could hurt competition and raise prices.^[1]