Document Versus Econometrics in Staples
1 September 1997
By Dr. Gregory Leonard with Dr. Jerry Hausman of MIT
The Court's decision in FTC v. Staples and Office Depot appears to have depended solely on the certainty of the companies' documents, which presented raw data showing that prices in areas with three office superstore (OSS) chains were lower than prices in areas with two OSS chains, which, in turn, were lower than prices in areas with one OSS chain. The resulting picture of OSS pricing was very clear and straightforward and was completely laid out in the companies' documents. The inference that the FTC argued should be drawn from these documents is that the differences in the number of OSS chains caused the price differences between three-, two-, and one OSS areas and, consequently, that the merger of Staples and Office Depot would lead to higher prices.
Economists generally are cautious about making any inferences based on raw price comparisons appearing in company documents. Economic theory suggests that pricing is affected by a number of economic factors beyond the presence or absence of any one competitor. For this reason, economists use econometric analyses to control for other economic factors when attempting to draw an inference concerning the effect of competition on prices.
In the Staples case, the two parties submitted econometric studies that provided estimates of the effect the presence of Office Depot had on Staples' pricing. However, due to sharply conflicting econometric results, the Court's decision did not cite either side's econometric studies. The decision instead relied only on the documents, thereby canceling out the two sides' econometric studies. In this paper, NERA Senior Vice President Dr. Gregory Leonard and MIT Professor of Economics Dr. Jerry Hausman discuss the role of the documents in the Staples case and analyze why the econometric studies canceled each other out. The authors draw implications for using econometric evidence in litigation when inferences based on documents must be overcome.
