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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