## Facts

- Kraft General Foods, through its Post division, acquired Nabisco’s ready-to-eat (RTE) cereal assets; the transaction closed in January 1993.
- Before the acquisition, Post held about 11.7% of U.S. RTE cereal sales, while Nabisco held about 2.8–3%.
- RTE cereal firms competed mainly through product introductions, advertising, coupons, and trade allowances, not sustained list-price cutting.
- New York sued under § 7 of the Clayton Act, § 1 of the Sherman Act, and New York’s Donnelly Act, seeking rescission or divestiture.
- After denial of preliminary injunctive relief, the court held a three-week bench trial with fact witnesses, party experts, and a court-appointed expert.
- New York argued the merger was anticompetitive due to (1) increased risk of coordinated pricing in a concentrated industry and (2) unilateral power from combining allegedly close substitutes, Post Grape Nuts and Nabisco Shredded Wheat.
- Defendants argued the relevant market was broader than “adult cereals,” that pricing was independent, and that empirical evidence showed weak substitution between the two cited brands.

## Issues

1. What is the relevant product market for evaluating the acquisition: all RTE cereals or a narrower “adult cereal” submarket?
2. Did the acquisition “may be substantially to lessen competition” in violation of § 7 of the Clayton Act (and parallel state-law standards)?
3. Did New York prove likely anticompetitive effects under either (a) coordinated effects (tacit coordination/price leadership) or (b) unilateral effects (ownership of close substitutes enabling profitable price increases)?

## Decision

- The court found the relevant product market was all RTE cereals sold in the United States, not an “adult cereal” submarket.
- The court held New York failed to prove the acquisition was likely to substantially lessen competition under § 7 of the Clayton Act or the Donnelly Act.
- The court rejected the coordinated-effects theory, finding insufficient evidence that the merger would materially increase the likelihood of tacit coordination or parallel price increases.
- The court rejected the unilateral-effects theory, crediting econometric and scanner-data evidence that Grape Nuts and Shredded Wheat were not uniquely close substitutes and that demand substitution was dispersed across many cereals.
- The court entered judgment for defendants and denied rescission or divestiture.

## Legal Principles

- Relevant product markets in differentiated-product industries turn on evidence of reasonable interchangeability and substitution patterns; alleged submarkets require proof of a meaningful break in the chain of substitutes.
- A § 7 plaintiff bears the burden to show a reasonable probability that a merger may substantially lessen competition; concentration evidence must be evaluated with market realities and competitive dynamics.
- Coordinated-effects claims require proof that market conditions and the merger’s structural change would likely increase firms’ ability and incentive to coordinate on higher prices.
- Unilateral-effects claims require evidence that the merged firm will gain pricing power because products are sufficiently close substitutes such that recaptured sales make a price increase profitable.
- Courts may rely heavily on empirical evidence, including scanner-data econometrics, to assess market definition and competitive effects.

## Conclusion

The court upheld Kraft’s acquisition of Nabisco’s RTE cereal assets, defining the market as all ready-to-eat cereals and concluding that New York did not prove likely coordinated or unilateral anticompetitive effects warranting rescission or divestiture.


New York v. Kraft Gen. Foods, Inc., 926 F. Supp. 321 (S.D.N.Y. 1995)