Problem 6. Merger in Home Improvement Retail Industry You are asked to evaluate a hypothetical merger between Home Depot and Lowe's, the two largest home improvement stores in the United States. The hypothetical) complaint filed by the FTC says: Stores in this industry sell a range of home repair and maintenance goods, such as hardware, tools, electrical goods, lumber and structural material for construction and renovations. These are one-stop purchasing stores and have the value of offering a wide range of products. Hardware stores, which are generally smaller and consequently sell fewer items, are excluded from this industry. Home improvement companies purchase goods from manufacturers and wholesalers and sell them 3 to end users in two broad groups: do-it-yourself consumers (17.4% of sales) and professional contractors (82.6% of sales)." "The homogeneous nature of many products makes the industry highly price sensitive. Compe- tition is very intense, and has forced companies to diversify products or exit the industry. Currently the market shares in this industry are as follows: Home Depot has 52.5% of sales, Lowe's 36.8%, Menards 6.5% and others have 4.2%. The merger of Home Depot and Lowe's would make this firm essentially a monopolist in this market." "Firms in this industry carry a wide range of products for home improvement with the following shares: Lumber and other building and structural materials: 32.6%; Hardware tools and plumbing and electrical supplies: 24.9%; Lawn, garden and farm equipment supply: 12.9%; Household appliances, kitchen goods and other related items: 29.6%." "There are other firms offering products in each of these segments, such as paint stores, other hardware stores, lumber & building material stores, lawn & outdoor equiment stores, nursery & Garden Stores, other retail stores selling appliances (such as department stores), there is no other that offers the wide range of products sold by the home improvement stores." "For these reasons, we consider the relevant market to be the home improvement stores in the US. Within this market, we also consider as distinct segments the do-it-yourself consumers and professional contractors. Given the high market share of the two merging companies, we file this complaint to prohibit the merger." I gathered some information from industry sources that show the following: Home Depot has a profit margin of 10% while it is about 6% for Lowe's. When Including all the sales of competing department stores (such as Bed Bath & Beyond, Costco, J.C. Penney, Macy's, Walmart) and building material stores (such as HD. Supply) total market share of Home Depot and Lowe's drops down to 4.2% and 2.9%, respectively 1. What do you think will be the key considerations in this case? 2. What inference can you make from the above information about the demand elasticity facing each of the two firme? 3. Assuming these firms are Cournot competitors, using data on price cost margins and market shares given above, estimate the aggregate market demand elasticity in the home improve ment market. By how much would you expect the merger would increase prices if indeed it were to lead the merged firm to become a monopolist? Problem 6. Merger in Home Improvement Retail Industry You are asked to evaluate a hypothetical merger between Home Depot and Lowe's, the two largest home improvement stores in the United States. The hypothetical) complaint filed by the FTC says: Stores in this industry sell a range of home repair and maintenance goods, such as hardware, tools, electrical goods, lumber and structural material for construction and renovations. These are one-stop purchasing stores and have the value of offering a wide range of products. Hardware stores, which are generally smaller and consequently sell fewer items, are excluded from this industry. Home improvement companies purchase goods from manufacturers and wholesalers and sell them 3 to end users in two broad groups: do-it-yourself consumers (17.4% of sales) and professional contractors (82.6% of sales)." "The homogeneous nature of many products makes the industry highly price sensitive. Compe- tition is very intense, and has forced companies to diversify products or exit the industry. Currently the market shares in this industry are as follows: Home Depot has 52.5% of sales, Lowe's 36.8%, Menards 6.5% and others have 4.2%. The merger of Home Depot and Lowe's would make this firm essentially a monopolist in this market." "Firms in this industry carry a wide range of products for home improvement with the following shares: Lumber and other building and structural materials: 32.6%; Hardware tools and plumbing and electrical supplies: 24.9%; Lawn, garden and farm equipment supply: 12.9%; Household appliances, kitchen goods and other related items: 29.6%." "There are other firms offering products in each of these segments, such as paint stores, other hardware stores, lumber & building material stores, lawn & outdoor equiment stores, nursery & Garden Stores, other retail stores selling appliances (such as department stores), there is no other that offers the wide range of products sold by the home improvement stores." "For these reasons, we consider the relevant market to be the home improvement stores in the US. Within this market, we also consider as distinct segments the do-it-yourself consumers and professional contractors. Given the high market share of the two merging companies, we file this complaint to prohibit the merger." I gathered some information from industry sources that show the following: Home Depot has a profit margin of 10% while it is about 6% for Lowe's. When Including all the sales of competing department stores (such as Bed Bath & Beyond, Costco, J.C. Penney, Macy's, Walmart) and building material stores (such as HD. Supply) total market share of Home Depot and Lowe's drops down to 4.2% and 2.9%, respectively 1. What do you think will be the key considerations in this case? 2. What inference can you make from the above information about the demand elasticity facing each of the two firme? 3. Assuming these firms are Cournot competitors, using data on price cost margins and market shares given above, estimate the aggregate market demand elasticity in the home improve ment market. By how much would you expect the merger would increase prices if indeed it were to lead the merged firm to become a monopolist