A federal judge has denied the FTC's request for an injunction to block the proposed merger between Whole Foods and Wild Oats. I was just telling co-conspirator Todd today that I thought that the FTC's theory in this case--that there is an organic and premium food grocery market separate from the regular grocery store market, even though any grocery store can carry organic and premium foods, and many, including Wal-Mart(!), do--was unusually silly.
Conflict of interest note: Guessing that no federal judge was likely to buy the FTC's theory, I recently took a small long position in OATS.
UPDATE: Here's Geoff Manne dissecting the FTC's argument in some detail over at Truth on the Market. Geoff calls the FTC's "conception of market definition ludicrous almost beyond belief."
Legal analysis for fun and profit?
The antitrust law problem of defining the market is extremely silly, from an economics point of view. The question is to what extent products are substitutes, which is why the economic analysis in such cases always tries to calculate cross-price elasticities. However, obviously those numbers will come out as a continuum: many products are to some extent substitutes.
Not having looked at this case in any detail, and going from the short explanation above, I would argue that specialty organic food stores would probably be able to charge a premium over and above the price charged by, say, Wall-Mart for a similar product. This suggests that these outlets are imperfect substitutes. However, this premium is unlikely to be very large, so the legal conclusion that there is, in fact, only one market seems reasonable.
What products, what substitutes? Is an organic apple bought in Whole Foods or Wild Oats somehow distinguishable from an organic apple bought in Wal-Mart? Or is "product" a sufficiently expansive concept so as to encompass the entire "package," that is the way produce is presented in the former vs the latter, store design of the former vs the latter, store locations, etc.?
Do those who know something about the industry, especially organic foods, think it plausible that a WholeFoods/WildOats combination would be able to keep a potential competitor like Wal-Mart, determined to get a piece of the action for itself, out? Are "organic" (is the alternative "inorganic"?) producers getting bigger, or are most of them still relatively small as compared to the major producers of food? Being the skeptic I am about the value of "organic," I know little about this "industry" other than I much prefer shopping in Whole Foods (no experience of Wild Oats), where I tend to ignore or go past the "organic" products, to shopping in Wal-Mart.
The Whole Foods - Wild Oats situation shows the need for a reconceptualization of the entire market definition concept in antitrust law. Where I am (Colorado) the merger will almost certainly have an anticompetitive impact, at least in the short term.
I agree that in the long term barriers to entry into the organic/premium food market are so low as to be virtually nonexistent -- in other words, Safeway could easily expand their organic selections as soon as Wild Oats stores nearby are closed down.
But don't kid yourself here: this is about acquiring and closing down Wild Oats stores. I have never seen any other rationale for the deal. And we can't forget that the loudmouth Whole Foods CEO "anonymously" brag-blogged about his plan ...
The same logic applies to those who will pay a $10K premium for a Lexus over an identically equipped Toyota.
Didn't a judge uphold the FTC's "superpremium" ice cream market argument to prohibit the acquisition of Ben &Jerry's (or was it another maker)? Why is this argument more absurd? I agree with you generally, here, I'm just uncertain that no federal judge would buy this theory.
@neurodoc: You are, of course, right. Two identical apples are perfect substitutes. One really big apple and two small ones are almost perfect substitutes, etc. Then again, two identical apples might not be identical if only one of them were "made in America".
I'm not sure whether this example works in the US, but over here there is Max Havelaar coffee, which is for all relevant purposes identical to other coffee, only they guarantee the farmer received a fair price.
In marketing terms, such factors are called the "extended product". They represent the facts about the product other than its physical properties that are relevant for the consumer, because they affect the value the consumer derives from the product. (This includes things like the brand, etc.)
As a result, two physically identical apples might not be perfect substitutes if one is sold by the evil corporate giant Wall Mart, and the other by a "respectable" organic foods store.