New York v. Kraft General Foods, Inc.

In 1992, Kraft General Foods, Inc. (Kraft) (defendant) began proceedings to acquire certain ready-to-eat (RTE) cereal assets of its competitor, Nabisco (defendant). At the time, Kraft’s Post brand was the third largest manufacturer of RTE cereal in the United States, with 11.7 percent market share. Nabisco was the sixth largest, with 2.82 percent. RTE cereal manufacturers mainly competed through new product introductions, advertising, coupons, and trade allowances. Several weeks after Kraft and Nabisco finalized the acquisition, the New York State Attorney General (New York) (plaintiff) sued Kraft, seeking either to rescind the merger or divest Kraft of Nabisco’s assets under Section 7 of the Clayton Act. New York argued that the Kraft-Nabisco merger was a horizontal merger that would substantially lessen competition in the RTE cereal market because it would make collusion among cereal manufacturers more likely. Specifically, New York asserted that the cereal manufacturers with the largest market share were price leaders and other manufacturers, like Kraft and Nabisco, simply followed the leader. New York also argued that by housing two competitive brands under one company (Post’s Grape Nuts and Nabisco’s Shredded Wheat), the merger would promote anticompetitive unilateral effects because those products were substitutes for each other. That meant that Kraft could raise the price of Grape Nuts and capture any sales lost through its sales of Shredded Wheat (and vice versa), resulting in greater overall profits. In response, Kraft argued that pricing decisions were made independently and pointed to market evidence suggesting that consumers did not view Grape Nuts and Shredded Wheat as substitutes for each other.