havior in question has resulted in the requisite injury to competition. If it has, then it should not, in our view, be allowed to claim immunity from the antitrust laws merely on the invocation of the traditional taboo against any kind of advertising-based monopoly proceeding. It should be put to the test in a litigated case and see if the industry can adequately explain why the fact that it has been allowed to harvest monopoly profits for a decade or so gives it a vested right to go on harvesting them in perpetuity.

We would emphasize again, however, that the central thrust of any proceeding here would be oriented primarily toward the structure/preformance characteristics of the industry in question and that the role of the relevant conduct described above the use of a very high advertising/sales ratio-is a secondary one. First, we expect that, should litigation eventually result, perhaps as much as 90% of the evidence introduced by complaint counsel would be aimed at developing those non-competitive features of the industry's structure and performance, a rather modest 10% or so to its conduct or behavioral features. Secondly, the "conduct" pattern we expect to find in the industry is not the gravamen of the case in another and even more fundamental sense, namely, it does not necessarily bear a great deal of relation to the kind of relief that we might ultimately want to ask for. For example, an offer from the three dominant firms here to revise their advertising/sales ratio downward-from, say, its present, level of 20% or more to, perhaps, a much more modest 2% or 3% figure (Bain suggests 5% as the "very high" point at which a significant product differentiation barrier generally tends to emerge, id., p. 415)—would by no means necessarily constitute a satisfactory resolution of the matter from the consumer's standpoint. If they offered such a "settlement," the reasonable inference would be that they had found some other way to maintain their dominant market shares and their monopoly prices. And these, not their advertising schedules, are our real concern here. Everyone is always interested in eliminating, of course, any and all devices that have proven helpful to the monopolist or the oligopolist in developing and maintaining his power, but we think it important to distinguish carefully between the ends themselves and the particular means of getting there that happen to have been used in the past. It is monopoly the law is concerned with, for example, not advertis ing; and the fact that a monopoly or an oligopoly happens to have been built or maintained by advertising in a particular instance does not mean that that is the only way it could have been built or maintained in that industry in the past or the only way it can be built or maintained there in the future.

The breakfast cereal industry has annual sales of nearly $1 billion, and ranks among the top 15 of our 417 four-digit manufacturing industries in terms of concentration. (As noted, the 3 largest firms in the industry hold some 83% of its total sales volume.) Advertising is estimated to equal approximately 20% or more of those firms' total sales. There are believed to be no significant economies of scale that would make it uneconomical to have the industry competitively structured. In short, there are potential gains to the consumer here from a restoration of effective competition this industry of perhaps as much as 20% to 25% in lower cereal prices, a savings of some $150 to $250 million. And of course the very lowest income groups would be the principal beneficiaries since a disproportionately large portion of their total income is spent on food (up to 50%, versus some 20% for the average income family), particularly on the basic grain products. There are some other, related potential benefits here as well, particularly the possibility of opening up the market in a serious way to the approximately 50 small firms that, while they currently account, as noted, for an aggregate of only about 2% of the industry's sales, sell products of comparable quality for as much as 25% or more less than the big three charge for their more highly advertised brands. We are aware of no matter within the competence of this Division that offers a higher potential return on its enforcement dollar.

We recommend that the attached Resolution authorizing an investigation be adopted by the Commission.

UNITED STATES OF AMERICA, BEFORE FEDERAL TRADE COMMISSION

Commissioners:

Paul Rand Dixon, Chairman

Philip Elman

Everette MacIntyre

Mary Gardiner Jones

James M. Nicholson

RESOLUTION DIRECTING INVESTIGATION OF THE BREAKFAST CEREAL INDUSTRY AND OF KELLOGG CO., GENERAL MILLS, INC., GENERAL FOODS CORP., AND OF OTHER PERSONS AND CORPORATIONS ENGAGED IN THE PRODUCTION, DISTRIBUTION, AND SALE OF BREAKFAST CEREALS

Whereas the Commission is of the opinion that an investigation should be conducted of the structure, conduct, and performance of the breakfast ceral industry and of Kellogg Co., General Mills, Inc., General Foods Corp. and other persons and corporations engaged in the production, distribution, and sale of breakfast cereals to determine whether that industry is effectively competitive in its structure, conduct, and performance characteristics, particularly whether the public interst in effective competition in terms of price and other beneficial forms is being served in that industry, and whether any or all of such persons have been or are engaging in acts or practices that tend unduly to concentrate sales in the hands of a relatively few firms, to raise costs and prices above the levels that would have prevailed had competition been effective, and to otherwise deny the consuming public the benefits of effective competition that would have prevailed had the industry been competitive in its structure, conduct, and performance characteristics, and that may constitute violations of Section 5 of the Federal Trade Commission Act (15 U.S.C. 45 (a) (1)); and

Whereas, the Commission believes it is in the public interest to conduct such an investigation; and

Whereas the Commission has authority under Sections 5, 6, 9, and 10 of the Federal Trade Commission Act (15 U.S.C. 45, 46, 49, and 50) and Sections 2 and 11 of the Clayton Act (15 U.S.C. 13 and 21) to investigate any person, partnership or corporation engaged in commerce and their relation to other corporations, individuals, associations, and partnerships and their acts and practices;

Now, Therefore, Be It Resolved That the Commission in the exercise of the powers vested in it by law, pursuant to its published procedures and rules of practice (16 C.F.R. Section 1.1 et seq.), and with the aid of any compulsory processes available to it, forthwith proceed with a nonpublic investigation, for the reasons and purposes herein stated.

By the Commission.

JOSEPH W. SHEA,

Secretary.

MEMORANDUM

JUNE 5, 1969. Subject: Commissioner Jones' Memorandum, Budget Plans of Division of Mergers, Fiscal 1971.

To: Commission.

From: Division of Mergers, Bureau of Restraint of Trade.

This is in response to Commissioner Jones' memorandum to the Commission, dated May 27, 1969, subject as above, and to her transmittal requesting "the Bureaus to respond in writing before the Commission's scheduled budget meeting."

Par. 1: The Division of Mergers selected 10 priority projects in order to comply with the Chairman's directive of March 20, 1969, which stated, in part, as follows: "I want to stress that your statement should focus primarily on what you are going to do-limited by divisions to your six to ten most important projects rather than on personnel requests." In merger law enforcement and development, we have no standard matrix to follow in determining which transactions should have a priority. On the contrary, it is the day-to-day development of a merger trend, plus our increasing expertise within an industry derived from in-depth investigations relating to specific transactions, or reaction to trends emanating from Commission level (such as the consumer protection activities), which affects our decision to select industry groupings on a priority basis.

During our budget deliberations and presentation last year it appeared there was some feeling the Commission's activities affecting food, clothing and housing should merit priority status. To the extent possible, and concommitant with the Division's overall responsibilities, earnest effort has been made to give preference to investigations affecting those areas of the national economy. Furthermore, in our day-to-day liaison with Justice, both agencies endeavor to avoid duplication of effort by having the agency with greater expertise in a product or industry area handle merger enforcement for that industry.

Our response to the direct question: "What are the reasons in terms of size of industry sales, size of industry members, growing concentration, number of industry members, etc. for each listed projects?" is as follows:

The Division of Mergers does not have immediately available answers to this broad question relating to industry structure on a listed project basis. With the exception of cement, each of the priority projects consist of several separate industries which comprise the project category. For example, grocery products includes many industries which market some 8.000 items sold in an average supermarket. The Commission's Enforcement Policy for Grocery Products Manufacturing indicates that in 1963 there were 32,000 food manufacturers, representing a decline from the 40,000 which existed in 1947. The cement industry consists of some 48 cement manufacturers and well over 4,000 ready-mix concrete producers, according to the Commission's Enforcement Policy for Cement. The non-priority projects grouping includes numerous industries in each category, such as: drugs, pharmaceuticals, cosmetics and sundries; food distribution; housewares and household appliances, electrical and non-electrical; plasties; reciprocity; Section 8; and textiles. However, in the non-priority projects certain specific industries are involved, such as baking, confectionary, diary, department stores, fertilizer, furniture, insurance, truck-trailers, shipping containers and vending. With respect to these, some of the information requested is believed to be available in various investigational files, but it would take considerable time to assimilate it. This has not been done in the interest of expedition, so that an overall response to Commissoiner Jones' memorandum can be submitted before the June 12th budget meeting. If such detailed information is required concerning the non-priority projects, we will obtain it upon request.

Par. 2: Up to this point, the existence of guidelines has resulted in a priority item. It has been our experience in cement and food distribution that the publicity attendant to those industries requires an additional amount of professional time to supervise the preparation of, and to dispatch annually the Section 6(b) orders and reporting forms, and subsequently to screen and evaluate the reported transactions and complaints. Thus, the guidelines have become priority items, because our experience to date indicates that considerable implementation is required to keep them effective and meaningful. They cannot be published and forgotten.

Par. 3: The Division of Mergers proceeds primarily on a case-by-case basis, and when we are successful in obtaining divestiture there is inevitably some industry restructuring involved. Basically, the Division responds to mergers as they occur. When numerous transactions occur within an industry, or in closely related

industries, it may indicate a trend. At this point the Division outlines an affirmative program to do what it can to halt the trend. In such instance, we might favor allocating manpower to such an industry over an isolated merger in another industry for which no merger trend is apparent. In addition, various outside forces intervene to inject programs which the Division must execute, such as through Commission directives, by issuance of industry-wide enforcement policies (guidelines), or as an outgrowth of economic studies of either specific industries or specific practices (reciprocity).

Coming directly to the question posed concerning what goals the Division expects to reach in Fiscal 1971, by each listed project and how it is to be reached, it is noted that when mergers are challenged on a case-by-case basis, the results thereof on an industry-wide basis are largely salutary. For example, the five department store cases and orders resulting therefrom, issued in 1965 and 1966, had a very salutary effect in arresting a developing merger trend in this industry. This situation is true with respect to most merger proceedings on a case-by-case basis. Other than the re-structuring achieved by divestiture in specific cases, the results on an industry basis flow not directly but indirectly from specific merger proceedings. Thus, these are the anticipated results of the specific merger investigations and formal proceedings now pending in the priority projects as well as in some of the non-priority projects. Inasmuch as litigation moves slowly and there is considerable uncertainty as to whether and when cases will be settled or decided on the merits by the Commission, it is most difficult to specify if the goal of the proceeding and its salutary effects will be achieved in Fiscal 1971, or in some subsequent fiscal year. In other words, merger matters categorized by priority projects to a large extent consist of an on-going program in many respects-programs that require anywhere from three to five years for completion. The only alternative to a case-by-case approach is greater utilization in appropriate circumstances of industry-wide approaches, as typified by issuance of enforcement policy statements (guidelines) by the Commission for specific industries, where merger trends may be developing. However, such trends in specific industries are not too prevalent at the moment, since larger merger diversification is the principal type of merger activity occurring at this time.

Answering specifically as to the effectiveness of spreading the Division's resources over the listed projects, it all boils down to an effort to remain filexible enough to investigate proposed major mergers as they are announced daily, and at the same time channel our resources and major activities for planning purposes along specified project lines. It should be remembered that rarely are these projects susceptible of being completed upon an annual basis. However, in this context, as more and more formal cases are brought they necessarily absorb a greater portion of our manpower, and our planning flexibility is reduced. This is true because once litigation is started it has to be followed through to completion, requiring considerable manpower-no less than two, and most of the time three, attorneys on major merger cases. Until this fiscal year (1969) we have been settling most cases, with relatively few proceeding to litigation. During Fiscal 1969 the situation has reversed, with the result that more manpower is required to carry forward the on-going program, and resources are not available for maintaining essential flexibility.

Answering further the question of whether or not manpower shortage will mean the Division is going to handle several of the listed projects inadequately. the answer is an emphatic "no". What it does mean is that whatever projects this Division undertakes will be handled properly and adequately, or they will not be undertaken at all. It also means, in regard to the priority projects, that (1) lumber and building supplies, and (2) apparel will have to be deferred until sufficient manpower is available to handle them properly.

JUNE 20, 1969.

Subject: Budget Plans of Division of Mergers-Supplementary Report for Fiscal 1971.

To: Commission.

From: Division of Mergers.

Reference is made to Commissioner Jones' memorandum of May 27, 1969, subject as above, and to the reply from this Division dated June 5, 1969. On

page 2, at the end of the third paragraph, we stated: "If such detailed information is required concerning the non-priority projects, we will obtain it upon request."

The following is an effort to supply the information available concerning nonpriority projects with respect to "size of industry sales, size of industry members, growing concentration, number of industry members, etc." as set forth by Commissioner Jones.

Fertilizer-This project became active in June 1965 when 3 major oil companies acquired major independent fertilizer manufacturers; the Department of Justice began an investigation but after a few weeks transferred the files to the Commission; 2 additional Commission files were opened in 1966 involving similar acquisitions; total sales in 1967 were $1.2 billion, with about 150 companies and concentration ratios of 34% for the top 4 and 54% for the top 5 companies; statistical information is sketchy with respect to this industry due to differing types of fertilizers involved and overlaps between producers.

Truck-trailers & shipping containers-Total industry sales in 1966 were about $796 million, with approximately 200 establishments, and with concentration ratio of 53% for the top 4 and 66% for the top 8 companies; the Commission's decision in the Freuhauf case has created a continuing interest in this industry. The present merger trend involves trailer manufacturers expanding by the acquisition of shipping container producers and ship building companies. Insurance-This is a very broad field which is experiencing rapid merger activity, much of a conglomerate nature involving banks and other financial institutions; life insurance (SIC 631) has annual sales of some $153 billion, with 1,730 companies listed in 1967; it is a very complicated industry concerning which this Division has no special expertise, but is one which demands attention. Department Stores-In 1963 sales by department stores totaled about $20.5 billion by some 4,250 establishments (SIC 531); the Division has had considerable experience in the field in the recent past, has obtained some consent orders, and must continue to police merger activities as they arise; one present investigation promises to go to complaint, or to consent settlement.

Vending-This project involves both merchandising and manufacturing and has been the subject of considerable activity by the Division in recent years; 1968 sales approximately $4.5 billion, and there are 5600-6000 companies engaged in automatic merchandising; high consumer interest requires continuing attention in this area.

Apparel-This project covers a vast field of related industries which had 1967 shipments of $20.8 billion, and about 15-20,000 establishments; concentration ratios vary widely and no average figure can be derived from the statistics, but in the more important categories such as men's and boys' suits and women's dresses the top 4 have over 20% and the top 8 as high as 57% of the market share; the Division has 6 major investigative files, some involving giant conglomerates, which require continuing attention.

Confectionery-This industry is highly concentrated with annual sales of about $2.5 billion from some 1,200 establishments; concentration ratios range from 24% for the top 4 and 34% for the top 8 in candy, to 88% for the top 4 and 96% for the top 8 in chewing gum; for reasons not yet clear, numerous conglomerate companies are buying out members of this industry at an increased tempo, and this development must be watched and investigated where indicated. Dairy products-This has been a Commission project for over 10 years due to increased concentration through acquisitions; 1967 shipments were $12.9 billion for fluid milk there are over 4,600 establishments with a concentration ratio of 23% for the top 4 and 30% for the top 8 companies; due to the Division's long experience with this industry and present orders outstanding against the major dairy chains we will continue to pay close attention to any future acquisitions or mergers.

Bakery products-This industry has had a history similar to that of the dairy products industry; 1967 shipments were $5.3 billion, from some 5.000 establishments; the concentration ratio for bread is 25% for the top 4 and 37% for the top 8. but for biscuits, crackers and pretzels jumps to 59% for the top 4 and 68% for the top 8 companies; again, outstanding Commission orders and industry familiarity require a continuing interest in future acquisitions or mergers on the part of this Division.