In 2001 H.J. Heinz Company announced plans to buy Milnot Holding Company s Beech-Nut for $185 million. The merger would combine the nation s second- and third-largest sellers of baby food, with a combined market share of 28 percent. The combined company would still be less than half the size of the market leader, Gerber, with its 70 percent market share. The FTC successfully blocked the merger, based on two observations:
Most retailers stock only two brands of baby food, Gerber and either Heinz or Beech-Nut. The two smaller companies compete vigorously for shelf space, with discounts, coupons, and other programs that lead to lower prices for consumers. After the merger, the Heinz brand would disappear, leaving Beech-Nut as a secure second brand on the shelves next to Gerber. The elimination of competition for second place would lead to higher prices
The smaller the number of firms in an oligopoly, the easier it is to coordinate pricing. The FTC argued that significant market concentration makes it easier for firms in the market to collude, expressly or tacitly, and thereby force price above or farther above the competitive level. In other words, in a market with two firms instead of three, it would be easier for the baby-food manufacturers to fix prices.