WASHINGTON - Whole Foods squeezes it rivals by slashing its prices as much as 5 percent when other natural foods markets open nearby, an economist testifying on behalf of federal antitrust regulators said Tuesday.

"I would say Whole Foods responds to competition from other players" in the premium organic natural foods stores, said Kevin Murphy, an economist at the University of Chicago.

The grocer cut prices in Boulder in anticipation of Wild Oats opening a flagship store nearby, Murphy said.

Murphy testified during a hearing on the Federal Trade Commission's intention to block Whole Foods' proposed $671 million purchase of rival Wild Oats. The FTC and Murphy claim that the merger would lead to higher prices for consumers who prefer premium organic and natural foods.

The FTC and Whole Foods each presented one economic expert Tuesday on the first day of a two-day hearing before U.S. District Judge Paul Friedman. If the judge grants the FTC's request to block the deal, legal experts predict that Whole Foods and Boulder-based Wild Oats will walk away once the merger deadline of Aug. 31 passes rather than pursue a lengthy appeal.

Murphy analyzed the effect on Wild Oats' sales and prices when a Whole Foods opened nearby, which he found generally results in squeezed margins and "a substantial decline in sales" for Wild Oats. His analysis didn't include what happened to Whole Foods prices when a conventional grocery store such as Safeway entered the market.

Wild Oats' planned opening of its Boulder flagship store prompted Whole Foods to slash prices by 2 percent.

That Wild Oats outlet, originally slated to debut in March, hasn't opened.

Whole Foods attorneys objected to Murphy's presentation of that evidence, saying that it hadn't been included in his written testimony and they weren't prepared to respond. Friedman agreed and said he won't consider that part of the testimony in his decision.

Murphy also wasn't able to examine what happened to Whole Foods prices when Wild Oats leaves a market, as it has in Scottsdale, Ariz., and Fort Collins, because there wasn't enough data. The closest situation was the opening of Earth Fare markets, which he said are similar to Wild Oats, in several North Carolina cities near Whole Foods stores. Whole Foods cut prices as much as 5 percent in Chapel Hill, N.C., in response to its new rival, he said.

Whole Foods attorney Paul Denis dismissed that testimony outside the courthouse after the hearing, calling it "an interesting sideshow" that has nothing to do with the case.

"Whole Foods isn't trying to acquire Earth Fare," Denis said.

Whole Foods expert witness David Scheffman spent much of his testimony refuting Murphy's analysis, arguing that both Whole Foods and Wild Oats "spend most of their money elsewhere, shifting back and forth" between premium organic and natural foods supermarkets and conventional supermarkets.

"There are core shoppers that only go to Whole Foods or Wild Oats, but that isn't a substantial number," he said.

Whole Foods' effort to buy Wild Oats grabbed the spotlight, in part, because of several internal e-mails and online postings from the company's outspoken CEO, John Mackey. Mackey wasn't in court Tuesday, although FTC attorney Mike Reilley referred his e-mail to board members that said buying Wild Oats would allow the company to "avoid nasty price wars" in several markets.

Friedman gave little indication of how he was leaning after hearing a day's worth of testimony and cautioned spectators against drawing inferences from his questions.

"Sometimes judges ask questions because they're stupid," he said at the start of the hearing. "Sometimes they ask questions because they want to know more. Sometimes they ask questions because the answer is not clear."

More than 150 reporters, analysts and observers packed into the courtroom and an overflow room.

Among those watching the proceeding was David Balto, a former policy director for the FTC, who now represents several consumer groups that oppose the merger. He felt that Tuesday's evidence didn't take into account the real reasons that shoppers go to Wild Oats or Whole Foods instead of a conventional supermarket: quality, variety and customer service.

"We've been listening to economists discuss price, but that's unrelated to a large portion of how these companies compete," he said.

Shares of Whole Foods jumped 10 percent in after-hours trading following the release of second-quarter results that beat analysts' expectations.

Whole Foods' quarterly profit slipped despite higher sales because it doubled spending on new stores, but the per-share earnings of 35 cents - equivalent to $49.1 million - topped the consensus forecast on Wall Street by 2 cents.

Tuesday's highlights

• University of Chicago professor Kevin Murphy, testifying on behalf of the Federal Trade Commission, said that Whole Foods slashed prices by 2 percent at its Boulder store in anticipation of Wild Oats' new flagship store opening just blocks away.

• Whole Foods attorneys objected to the introduction of this evidence, saying that it was "the height of unfairness" that this information came out in court on Tuesday as a surprise to Whole Foods. The judge agreed and said he would not consider that portion of testimony in his ruling.

Today's highlights

The FTC and Whole Foods will each present three hours of arguments to the judge. The judge has said he will rule before he goes on vacation Aug. 15.

davisj@RockyMountainNews.com 303-954-2514

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