Archive for May, 2016

The FTC Should Not Have Blocked Staples-Office Depot

The Federal Trade Commission (FTC) can’t bring a suit against every merger that threatens competition. Given its scarce resources–it has limited staff and budgets for external experts–the agency has to pick its battles carefully. Among the set of the mergers that would raise prices, how should it choose?

There are some obvious filters. For example, the FTC should not pursue cases in dying industries: As dinosaurs are toppled by new technologies, the opportunity to preserve consumer welfare is limited. Nor should the FTC pursue cases where the victims are large, sophisticated buyers (think Fortune 100 firms).

Consider a subtle filter: The FTC should not pursue cases where the industry is characterized by large negative externalities. Before turning to paper-based office suppliers, implicated by the Staples-Office Depot merger, let’s focus on toxic chemicals to drive the point home.

Two tanneries are situated along a river, spewing pollution into the water like nobody’s business in proportion to the output of the firms. The tanneries are tired of competing, and decide to merge. The FTC hires a world-class economist from Berkeley, who estimates that the merger will lead to monopoly prices. Should the FTC block it?

There’s no doubt the merger is anticompetitive. But as any good economist knows, relative to the competitive equilibrium, a monopolist produces at levels closer to the socially optimal output in the presence of negative externalities. We want pollution to come down. An efficient way to achieve this objective is to permit the two firms to merge and raise prices, thereby discouraging consumption of leather-based products. (We should also enforce the relevant environmental laws, but that is outside the scope of the antitrust agencies.)

Now back to paper-based office products. Due to environmental concerns, and due to a need to quickly incorporate materials into work product, I prefer to read documents on my screen. But my (generally older) partners can’t print fast enough. Some appear to print every email. Any why not? The cost to the partner of printing an email is zero. And the cost to the firm is near zero.

If that doesn’t annoy you, consider these stats from the Paperless Project:

  • Americans consume more paper per capita – upwards of 500 lbs. annually – than anyone else on earth. On average, a person in the United States uses more than 700 pounds of paper every year.
  • The United States uses approximately 68 million trees each year to produce paper and paper products.
  • The average office worker continues to use a staggering 10,000 sheets of copy paper every year.
  • Discarded paper is a major component of many landfill sites, accounting for about 35% by weight of municipal solid waste.
  • Pulp and paper is the third largest industrial polluter to air, water and land in both Canada and the United States, and releases well over 100 million kg of toxic pollution each year.
  • 40% of the world’s industrial logging goes into making paper, and this is expected to reach 50% in the near future

Which brings me to the FTC’s dogged pursuit of Staples-Office Depot. I am skeptical of the merits of the FTC’s claims regarding anticompetitive effects. Although the price discipline of Amazon is hard to detect looking backwards, on a going-forward basis, Amazon Business, which hit $1 billion in sales in its first year and is growing at 20 percent per month, will likely displace these two dinosaurs in a matter of years.

But let’s grant the FTC its (unpersuasive) theory of harm. Why in the world should we encourage competitive pricing of paper-based office products, given the horrific things paper does to the environment? A monopoly provider of paper-based office products will raise the price of printing emails, which is a good thing in my book.

For now, environmentalists can only pray that Amazon chases the dinosaurs out of business, and then raises prices to monopoly levels. Either that or pray that Millennials have different habits when it comes to printing emails in the office.

For industries characterized by negative externalities, the FTC should think twice before stopping mergers to monopoly. Did I mention that alcohol consumption is associated with violence? Of course, no merging beer producer would make this argument before the antitrust agencies. But a snarky economist with no skin in the game just might.

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The FCC’s Merger Conditions in Charter-TWC

Some economic thoughts are just too complicated for Twitter. I need about 560 words to vent properly on the merger conditions that the FCC imposed on Charter-TWC. So sit back.

The first condition that deserves economic scrutiny is the FCC’s seven-year zero-price regulation on interconnection. For seven years, Netflix will make zero contribution to Charter’s recovery of broadband infrastructure costs. Although economists object on efficiency grounds to placing 100 percent of cost recovery on the more price-sensitive side (broadband users) of this two-sided market, at least this condition bears some resemblance to the FCC’s theory of harm–namely, that the combination of Charter and TWC would increase the merged firm’s pricing power vis-a-vis national content providers such as Netflix. But if you really believe this, as my liberal friends do, then why not just block the merger? Why approve a merger that facilitates the exercise of market power only to regulate that exercise out of existence?

That Charter offered up this condition to see the deal though, or that Charter had not previously charged for interconnection fees does not make this condition anything less than blatant price controls. Apparently, price controls are in vogue these days, with the FCC regulating the price of business broadband service at both the wholesale and retail level. But to an economist, this stuff is hard to swallow. Consumers hate higher prices, but high prices are also a signal to broadband rivals to deploy duplicative networks. If you think there aren’t tradeoffs, check out what’s going on across the pond, where price regulation (in the form of mandatory unbundling) and the absence of facilities-based competition go hand in hand.

The second condition that riled me up was the obligation for Charter to invade a rival cable operator’s territory. This requirement is misguided for at least two reasons. First, the merger of Charter and TWC does not reduce competition in the provision of broadband service to any household in America, as the two cable operators serve non-overlapping territories. This condition, like so many other FCC merger-related requirements in the past, is completely divorced from the competitive harms raised by the merger. It is yet another example of the FCC using the merger review process as a means to regulate the industry.

Second, if Charter satisfies this overbuild requirement in the territory of a cable operator with fewer broadband subscribers, then the requirement perversely increases concentration at the national level.

To see how, consider the following illustrative example: Charter invades the territories of Cox, Cablevision, and other smaller cable operators, shifting three percentage points of market share (about 1.3 million subscribers with speeds of 10 Mbps down or faster) towards Charter. (The market share figures are from a January 26, 2016 story in Ars Technica.)

 Provider Subs Post Merger Share Squared Subs Post Invasion Share Squared
Comcast 29% 841 29% 841
New Charter 24% 576 27% 729
Cox 5% 25 4% 16
Cablevision 4% 16 3% 9
Suddenlink 1% 1 1% 1
Mediacom 1% 1 1% 1
Wide Open West 1% 1 1% 1
Cable One 1% 1 1% 1
RCN 0% 0 0% 0
Other Cable 5% 25 4% 16
Verizon 9% 81 9% 81
AT&T 12% 144 12% 144
Century   Link 4% 16 4% 16
Frontier 1% 1 1% 1
Windstream 1% 1 1% 1
Fairpoint 0% 0 0% 0
Cincinnatti Bell 0% 0 0% 0
Other LECs 1% 1 1% 1
Other 1% 1 1% 1
TOTAL 100% 1,732 100% 1,860

As the table shows, if Charters takes subscribers from smaller cable operators, then nationwide concentration (or HHI) increases from 1,732 to 1,860. This is just one illustration, and the result would hold so long as Charter invades any cable operator’s territory save Comcast.

Recall the FCC’s theory of harm is that the merger would permit Charter to exercise market power vis-a-vis Netflix. By perversely increasing nationwide concentration, the FCC’s overbuild requirement will have strengthened Charter’s pricing power!

There. I’m done.

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