Snap, Crackle, Flop!

The FTC drops its effort to crunch the Big Three cereal makers

As an encore to the spectacular wind-ups to the A T & T and IBM antitrust suits, the Government last week dropped its nine-year effort to break up Kellogg Co., General Mills and General Foods, three breakfast champions that control 80% of the ready-to-eat cereal market. The case was the last of Washington's marathon antitrust battles against Big Business, which have clogged courts and enriched lawyers for more than a decade.

The Federal Trade Commission's decision to halt the cereal suit was another example of the Reagan Administration's antitrust philosophy. The Government still intends to block mergers that significantly reduce competition, but it will no longer try to dismantle existing firms simply because they are big and successful.

The end of the cereal case was also a landmark setback for the Government's novel antitrust theory that a group of companies can "share" a monopoly. The FTC's staff had charged that the three firms had a "tacit understanding" that kept cereal prices high and stopped competitors from entering the business. If the cereal makers had lost their case, the shared monopoly doctrine might have been used against autos, aluminum and other industries dominated by a few firms.

While not claiming that there was any active collusion, the FTC attorneys contended that Kellogg, as the industry price leader, determined cereal prices, and General Mills and General Foods simply followed along. Moreover, the Big Three allegedly thwarted the emergence of new competitors by controlling the amount of shelf space in groceries allotted to various cereals. The FTC staff also charged that the companies promoted a bewildering profusion of trade names like Trix, Kix, Froot Loops and Fruity Pebbles and thus made it prohibitively expensive for smaller firms to introduce their own brands. According to an FTC study, these anticompetitive actions resulted in steeper prices that cost breakfast buffs a total of $1.2 billion between 1958 and 1972.

But during years of hearings before two FTC administrative law judges, the Government's case grew as soggy as the last Rice Krispies in a bowl of milk. Despite spending almost $6 million and compiling 40,000 pages of testimony with 2,900 supporting documents, the Government never proved that the cereal makers had reaped illegal monopoly profits. Last September FTC Judge Alvin Berman recommended that the suit be dismissed.

The decision was delayed, though, by an internal squabble among the FTC commissioners. Chairman James Miller, a Reagan appointee known for his pro-business views, was eager to drop the suit. Michael Pertschuk, a zealous consumer advocate who was commission chairman under President Carter, was just as adamant to keep it going. In December the two other commissioners, Patricia Bailey and David Clanton, both moderate Republicans, voted with Pertschuk to hear more arguments. By last week, however, Bailey and Clanton had switched sides. Clanton concluded that no cereal monopoly exists. Bailey decided that, monopoly or no, the proposed punishment was inappropriate. "To carve new cereal companies from the hides of existing ones," she said, would be "draconian."

The cereal makers crackled with excitement at the news. Said Kellogg Chairman William LaMothe: "The suit has been an expensive and wasteful cloud hanging over our company. We applaud the decision." Or as Kellogg's Tony the Tiger might have put it, the outcome was GRRRRRRREAT!

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