Pricing pencils: the FTC's creative market definitions.

• Author: Lynch, Michael W.

When my ink-jet cartridge starts to sputter or I run out of once-used paper to cycle back through my printer, I, like many small office managers, am faced with a choice. If the day is nice, I can walk four blocks to the west and restock my garrison with provisions from Office Depot. Or, if I feel like walking past the White House, I may visit Staples. When my ink runs dry on deadline, I stop short of the Depot and buy a cartridge at Time Office Products, a small office supplies store that promises to "provide any of 30,000 urgent supply items" the day you call, if you are willing to pay a slightly higher price. Given enough foresight, I need not even leave my office. With just a half-day's notice, I fax an order form into the 800-number ether, and the next day a delivery man (yes, he is always a man) brings my supplies at prices competitive with the two superstores.

This story is not remarkable. Similar scenarios are played out across America. What is remarkable is that the federal government contends that these choices don't exist. In its efforts to block a merger between Staples and Office Depot, the Federal Trade Commission, which itself purchases office supplies from 105 vendors, has objected to this marriage on the grounds that it would result in a manila envelope monopoly.

Never mind, say the regulators, that Staples and Office Depot once combined would account for roughly 6 percent of the office supply market nationwide. Never mind, they say, that both stores lower the cost of office supplies by at least 20 percent in markets in which only one enters. Never mind, they say, that the two stores spent millions of dollars crafting a plan to sell 63 stores to rival OfficeMax, in a good faith attempt to appease FTC staffers. Never mind, they say, that the business strategy to which both stores owe their success is relentless price cutting, which has saved Americans hundreds of millions of dollars since superstores first revolutionized the office supply business in the mid-1980s.

The FTC likes the world as it is - with three office supply superstores. To keep it that way, it is victimizing the very companies responsible for this world of low-priced office suppliers. It claims the superstores compete only against each other in markets where all three exist. In fact, the three stores - Office Depot, Staples, and OfficeMax - account for less than 10 percent of the office supply market, although there is regional variation. The FTC paid for an...