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When Dollar General offered to merge with Family Dollar, the monetary values involved were a lot higher than what customers expect to find on store shelves: It promised $9 billion in cash. But the problem, according to Family Dollar, was not the high price for the merger. It was the potential for higher prices on those shelves too.

Antitrust regulations exist mainly to prevent any single entity in a market from having so much power that it can set policies and prices at whatever level it prefers. Because consumers lack access to any other option, they have no choice but to pay those prices. Thus, regulators will reject mergers that appear likely to create a monopoly in a market.

In accordance with its interpretation of existing laws, Family Dollar rejected the merger offer from its competitor Dollar General, arguing that the merger ultimately would be rejected by regulators. That is, if the first and second largest firms in the dollar store segment merged, the resulting conglomerate would be so huge that it could charge anything it wanted, and customers would have to pay that price to obtain the goods. In this view, the competitive market is defined by the dollar store category.mhhe015257

An alternative view suggests that the merger would not be anticompetitive, because the market should be defined to include all other retailers that make similar items available to consumers, such as Walmart, drugstores, and grocers. If the competition is broadened this way, the merged firm would not have a monopoly, and it would be forced to keep its prices competitive, to avoid losing customers to other retailers with lower prices. Dollar General has embraced this view, arguing that the merger would be acceptable to regulators and not harmful to customers.

Support for the latter interpretation is available in some recent decisions to allow mergers between similar firms in other channels, such as Office Max and Office Depot. In that case, regulators also noted the influence of Amazon, such that purchasers of copy paper and toner could easily shop online if the prices at their local office supply stores raised too high. Yet most evidence suggests that dollar store shoppers tend not to shop online. In addition, in many rural communities, one or two Dollar General or Family Dollar stores might appear in the local strip mall, but the Walmart might be miles away. In such cases, the threat of antitrust concerns may grow more acute.

SOURCE:Tom Ryan, “Does Family Dollar/Dollar General Make a Monopoly?” Retail Wire, August 24, 2014, http://news.yahoo.com

Discussion Question:

If Family Dollar and Dollar General merge, what do you believe will happen to retail prices?