Thursday, July 31, 2008

Econ 101: Anti-Trust and the Whole Foods/Wild Oats Merger

From the Oregonian, I learned of a federal appellate court ruling that sent a decision allowing the Whole Foods/Wild Oats merger back to district court. Here is a link to the LA Times as the Oregonian website is not letting me access it - big surprise.

I thought this is a good chance to discuss a few aspects of anti-trust oversight in the United States. The basics of anti-trust in such a case is pretty clear: when firms get too much market power (have too few competitors) the profit incentive causes them to raise price and lower output which causes a loss in social welfare. Fewer consumers get to consume and those that do consume at a higher price while the firm gets excess profits.

But determining market power is often quite difficult for the simple reason that 'markets' are very hard to define and therefore 'competitors' are hard to identify. Take Whole Foods, what exactly is their market? Is it organic, gourmet and overpriced groceries. Just gourmet? Groceries full stop? Whole Foods argued that in today's market there is no longer much distinction between them and major grocery chains like Safeway because the latter also is stocking more organic and gourmet foods. So Whole Foods wanted to define the market as groceries in general and thus all the major chains are competitors, so a merger with Wild Oats is not a concern - there is plenty of competition left over. The Federal Trade Commission wasn't so sure, they argued that Whole Foods serve a distinct market - gourmet and organic foods - and thus opposed the merger. [By the way, it is very rare that these things get to court, they are usually settled between the two parties]

So who is right? Well it is pretty hard to tell. The usual course is to look at the cross-price elasticity of demand. This measure, for example, the change in demand for Whole Foods goods when Safeway changes their prices. As you can imagine trying to isolate this effect in the world of supermarkets where prices are always and constantly in flux is almost impossible. Another thing that matters is the 'contestability' of the market - how easy would it be for a new competitor to enter the market. This limits firms' ability to exploit concentration by raising prices because it would encourage the entry of new competitors. I imagine that the current state of Safeway-type stores has a pretty minimal influence on Whole Foods demand, but that is would be very easy for Safeway-type stores to ramp up their offerings to compete. In general, I would not be that worried if I were the feds.

NB: It seems a little absurd in the land of New Seasons and other such stores, but when I lived in Denver, Whole Foods and Wild Oats were the entire organic market. I used to frequent Whole Foods until my local Safeway started stocking many more organic alternatives - which is why I am a bit sanguine about the merger.

1 comment:

jessibeaucoup said...

It is hard to imagine a world without New Seasons!! I've set foot in a Whole Foods exactly once...