In a 2-1 decision, the DC Circuit issued this morning an opinion reversing the lower court's denial of a preliminary injunction sought by the Federal Trade Commission to block the merger of Whole Foods and Wild Oats. As no injunction was granted pending appeal, the merger has moved forward with substantial operational changes having already been made. The decision means that the FTC should now have the opportunity to pursue an eventual Section 7 case in full.
The court issued three opinions this morning. Each of those opinions agrees that the central issue in the case—indeed perhaps the only issue in the case—is market definition. The Federal Trade Commission contended that a separate market existed called premium, natural, and organic supermarkets ("PNOS") and that Whole Foods and Wild Oats dominated those markets. The merging parties contended of course that the real market was grocery stores or perhaps even more and that they competed in those markets with national grocery chains and behemoths like Wal-Mart and Target.
To situate the case quickly, consider two slides from my class discussion.
At the time that the merger was announced, Whole Foods and Wild Oats had a total of roughly 300 stores, but all of those stores did not compete directly. Indeed, once we adjusted for size and geography, it appeared that there were 19 stores in which Whole Foods and Wild Oats engaged in head-to-head competition.
How would a merger change this? Consider the second slide:
That slides sets out four different market patterns. In segment I cases, only "ordinary" grocery stores compete. In segments II and III, either Whole Foods or Wild Oats competes with one or more ordinary grocers, but not with each other. Finally, in segment IV, Wild Oats and Whole Foods compete with each other and also with ordinary grocers. This list is not absolutely complete obviously, as we could have markets without ordinary grocers at all (high-end enclaves presumably).
At a first cut, the merger could be expected to do little in markets matching segments I, II or III. But the merger raises the possibility of converting the 19 markets that match segment IV into segment II markets? How much would that change competition in those markets?
The answer is: I don't know and I don't think any of us know from the information that has been released publicly. Like the original district court opinion, today's opinion contains redacted segments that prevent the public from seeing exactly what the predicted effects will be of the merger. There is expert testimony on both sides from well-regarded economists and that isn't fully available to us.
The merger effects depend on how consumer's behave. The majority opinion finds that the lower court gave too little emphasis to the consequences of the merger for core customers of Whole Foods and Wild Oats and focused instead on the consequences for marginal customers. The majority opinion focused in particular on Kevin Murphy's expert testimony regarding Whole Foods's margins in markets in which Wild Oats was present and carefully distinguished between dry grocery items and the perishables described as the core business of Wild Oats and Whole Foods.
Market definition is the central issue in many, many antitrust cases. We can do a certain amount of arm-chair guesswork about this, but ultimately, the numbers should drive the analysis. At least so far in this case, most of us likely to write about this don't have those numbers and therefore are hard-pressed to be sure about how the analysis should actually play out.
The next steps forward should be interesting, first as to whether the FTC can actually make out its case and then what to do if the merger is found to violate Section 7 of the Clayton Act. I assume—but don't know to be sure—that large parts of the overall corporate structure of running Wild Oats have vanished and wouldn't be readily rebuilt.