Antitrust

Cereal Killers

Stop Congress before it strikes again.

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It is tempting to dismiss the recent howling by Reps. Sam Gejdenson (D-Conn.) and Charles Schumer (D-N.Y.) for federal investigation of the ready-to-eat cereal business as just another pathetic dog-and-pony show designed to score a couple of enterprising pols some free media coverage. But the congressmen's jeremiad is so overblown and their call for antitrust action so ludicrous that it is worth pausing over the matter. Such self-aggrandizing complaints perfectly illustrate political hubris at work—and such calls to legislative arms all too often result in action.

"We are paying caviar prices for cornflakes quality," proclaims Schumer, reportedly an "avid muncher" of Cookie Crisp and Frosted Flakes. In a report titled Consumers in a Box, Gejdenson and Schumer say, "The four largest cereal companies—Kellogg, General Mills, Post, and Quaker Oats—control nearly 85 percent of the market" and, "as a percentage of the retail price, the cereal industry devotes more money from sales to marketing and profit than any other food surveyed." The congressmen also charge that since 1983 the average price of cold cereals has risen 90 percent, twice the rate of increase for other foods, and that cereal has the highest profit margin of any food product.

"As you know,…high profit margins may be the result of collusive behavior….This industry has ceased to be responsive to consumers and market forces," wrote Gejdenson and Schumer in a letter to Attorney General Janet Reno. "Consumers don't have a real choice in this market."

The congressmen's professed concern for the three-fifths of children who have cereal for breakfast every day led them to ask Reno to "inform [them] of the actions that can be taken to change the pricing structure of the industry."

"The…cereal companies can easily reduce their prices and still realize a reasonable profit," concludes Consumers in a Box. In other words, it may be time to nationalize the cereal business.

It is hard to know which is more disturbing: Gejdenson and Schumer's weak grasp of the situation or their arrogant proposal to "change the pricing structure" of an entire industry so that it fits their fancy. Regardless of the congressmen's assertion, consumers retain the "realest" choice imaginable regarding cereal: not to buy it in the first place. But consumers freely choose to buy more than 2 billion boxes annually.

A chief reason is economic: On average, a bowl of cereal costs between 15 cents and 30 cents, including milk. When adjusted for coupons, cereal prices have risen between 1 percent and 2 percent annually since 1989—lower than the rate of inflation. Since 60 percent of all cereal is bought with coupons or while on sale, that is of no small consequence.

Indeed, last May General Mills cut the prices of its top-sellers by 11 percent. Earlier this year, Quaker Oats introduced a line of bagged cereals that retail for about $2.00 a unit. Budget-conscious shoppers can opt for generic, in-store brands and save about a buck-and-a-half per box.

The congressmen admit as much, but as Schumer has lamely countered, it's often difficult to locate generic brands on store shelves. If that sums up Gejdenson and Schumer's opinion of typical consumers, it's no wonder they feel a need to shelter such tender souls from the harshness of the marketplace.

In fact, protecting consumers goes hand in fist with punishing cereal producers. Schumer complains that the "high" price of cereal proves "the free market isn't working." "Why should a box of cereal, made of cardboard and containing nothing more than grain, cost an arm and a leg?" he asks. There's a simple answer, but it's one that Schumer is not willing to consider, since it leaves him out of the power equation: That's what people are willing to pay. The ultimate price at which a product moves off the shelf is a function of supply and demand, not simply the cost of production.

Similarly, it is far more likely that the industry's higher-than-average profit margin results from producers' abilities to minimize costs while providing a popular product than from "collusive behavior." Just this past February, U.S. Second District Judge Kimba Wood shot down the state of New York's challenge to Kraft's 1993 acquisition of RJR Nabisco's cereal division, noting that it would be highly unlikely and extremely difficult for the big cereal firms to rig prices. Competitors, after all, do like to compete.

And, unfortunately, politicians like to legislate. If they fancy themselves capable of determining "reasonable" profits for Cap'n Crunch and Count Chocula, it's only a small leap to do the same for caviar, for cars, and for any other industry that dares to turn a profit.

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