Ignoring the Lessons of Von’s Grocery: Some Thoughts on the FTC’s Opposition to the Whole Foods/Wild Oats Merger

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Thomas Lambert, Jun 14, 2007

One of the most maligned antitrust decisions in history involved a merger of grocery store chains. Even those voices inclined toward substantial antitrust intervention believe the Supreme Court erred in its 1966 Von’s Grocery decision, which condemned the merger of the third- and sixth-largest grocery store chains in Los Angeles. Indeed, even the president of the highly interventionist American Antitrust Institute conceded that the Supreme Court “probably went too far” and acknowledged that “if Von’s Grocery had remained the rule, all of our industries would be highly fragmented, and consumers would have lost out on many cost-cutting efficiencies.” The fact is, grocery retailing involves huge scale economies and low barriers to entry  a combination that renders most consolidations beneficial to consumers.

The Federal Trade Commission (FTC) has apparently forgotten the lesson of Von’s Grocery. On June 5, 2007, the Commission filed a complaint seeking to block the merger of Whole Foods Market, Inc. and Wild Oats Markets, Inc., two high-end natural and organic supermarkets. This is bad news for consumers. If the FTC successfully blocks this merger, it will thwart consumer-friendly productive efficiencies without procuring any benefits in terms of constrained market power.

A consolidation of competitors is a classic “mixed bag” with the potential to create both negative and positive consequences for consumers. On the negative side, a consolidation can enhance the combined firm’s market power, reducing the competition the firm faces and thereby permitting it to increase its prices and/or cut back on quality. On the upside, a merger may permit the larger combined firm to capture scale economies and thereby reduce its per unit costs (and thus its prices). The trick for regulators is to determine whether the anti-competitive harms of a consolidation will exceed the pro-competitive benefits. Only if anti-competitive harms are likely to significantly eclipse pro-competitive benefits should regulators intervene to prevent the operation of market forces.

So how do the anti-competitive harms and pro-competitive benefits shake out in the case of the proposed Whole Foods/Wild Oats merger? According to the FTC, which appears to have focused entirely on potential anti-competitive harms, the merger would represent a bad deal for consumers because a combined Whole Foods/Wild Oats would have substantial market power  that is, it would be sufficiently insulated from competition that it could profitably raise prices or decrease quality without losing too much business to competing producers. That seems wrong.

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