UPDATE 2-CEO's comments raised at Whole Foods hearing

(Recasts with testimony by Whole Foods economist)

By Peter Kaplan

WASHINGTON, July 31 (Reuters) - An economist for Whole Foods Market Inc (WFMI.O) was forced on Tuesday to grapple with the past comments of the company's chief executive as he testified against government efforts to block the acquisition of Wild Oats Markets Inc OATS.O.

Whole Foods economist David Scheffman was asked how he could square his benign view of the merger with the statements of Whole Foods CEO John Mackey, who told the company's board of directors in an e-mail the deal would prevent "nasty" price wars with Wild Oats and head off future competition with conventional supermarket chains.

"If you assume Mr. Mackey is right, doesn't your conclusion have to be wrong?" Federal Trade Commission lawyer Matt Reilly asked Scheffman.

"I seriously considered this. I treated it seriously," Scheffman responded. But he said economic data showed the deal would not hobble competition among organic grocers, as the government claims.

Scheffman's testimony came on the first day of a two-day hearing in which the FTC is seeking to persuade U.S. District Judge Paul Friedman to block Whole Foods' proposed $565 million purchase of Wild Oats.

The government says the merger would reduce competition and raise prices for consumers, but the companies argue that they already face fierce competition from traditional supermarkets.

Scheffman said Whole Foods and Wild Oats stores compete with regular supermarkets, with many customers shopping at both organic and conventional markets. But Friedman questioned whether that really made them competitors, unless they were buying the same products at the different stores.

Whole Foods and Wild Oats lead the organic niche market, but their total sales pale in comparison to larger retailers.

In the comments cited by FTC, Mackey told Whole Foods' board: "(Wild Oats) is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space.

"Eliminating them means eliminating this threat forever, or almost forever," Mackey said.

The companies have downplayed Mackey's writings, saying he is "an extremely competitive individual" who does not care for his competitors.

Earlier in the day, an economist for the FTC, Kevin Murphy, testified that competition between Whole Foods and Wild Oats had led to lower profit margins.

Murphy cited instances in which Whole Foods opened a store near a Wild Oats market, leading to a "substantial decline" in Wild Oats' profit margin.

But Scheffman countered that Murphy had failed to show how actual prices to consumers were affected by the competition between Whole Foods and Wild Oats or provide an example of how the market would be harmed by the disappearance of Wild Oats.