R.S.
Yes, you are overreacting, but you're a new mom and it's hard not to. My mom has 17 grandchildren, and here's the thing--and my friends who are new grandmothers agree--the first one is special. My mom told me once that she tries never to show a difference, but that there is something extra wonderful about the first one. She said she never felt that way with her children. She tries very hard to never show it. But I've noticed that my step-dad, who we're very, very close to, loves my son (the first) to distraction, but treats his daughter's first child just a little tiny bit differently. My grandmother loved me best and I always knew it, and I was her first grandchild.
You have your personal feelings hurt because you want everyone to be as overwhelmingly in love with your child as you are, especially having waited so long to have her. Yes, the little boy is being rotten, but he's had the grandparents all to himself for a long time and doesn't want to share. That's typical. My youngest daughter loved her baby cousin, but would try to shove her off my lap if I held her because she was jealous of the attention. The four year old said exactly what he wants--he wants you to take that baby away so that he is not just the center of attention, he'll have ALL the attention. Think about how silly it is to let a four year old hurt your feelings! While I think his mother should have a talk with him about when it is appropriate to express his feelings, I don't think it's a big enough deal to allow a rift in the family. Also, if you paid lots of attention to him before you had your own baby, he's feeling sibling rivalry--he wants you to leave her home so you'll pay attention to him. My kids were preteens when my brother the "fun uncle" had his kids, and even at that age, they kinda resented that Uncle didn't come and wrestle with them or play ball with them every time they asked because he had to take care of his babies. They love their cousins, but they felt displaced in his affection.
Another thing I've noticed among parents who had a hard time getting a baby is that they are VERY protective and very quick to be afraid something bad will happen to their baby. While you don't want the kid hitting her with a stick, just move the baby or take away the stick. Take the baby out of the walker and away from the cousin. You're basically having a fight with a four year old and giving it way too much importance.
So here's the thing. Yes, grandma may love the first grandchild more, or the real grandchild more, but she seems to love your child, too, and she probably has plenty of love for both children. She may not have realized that she loved the first one more until you brought it up, or she may have known but feels bad about it (my mom does) and she's now feeling defensive because you caught her. If you love your step-mom and have had a good relationship with her before, back off and try again. Your tension makes things tense for everyone in the room. You're watching her every minute to see if your daughter is slighted. That's just not fair. She's had four years to learn to love her darling boy, and she's just getting to know her precious girl. Share the baby, pay more attention to the nephew, and give everyone some time to adjust to the new status-quo. Remember, your sister is also watching to see if the new baby takes her son's place as the favorite, and may have told her mom that she was afraid she'd love the new baby more or that her son would be upset if grandma showed too much love for the new baby. All the mommies need to remember that mothers and grandmothers have an infinite capacity to love, and then let them do it.
On the other hand, if when they're bigger grandma gives one child a cookie and tells the other she's fat, buys gifts for one on holidays and not for the other, invites one to stay a week and won't keep the other over night, etc., you have a problem. My dad's step-grandmother bought gifts for his baby brother, who was her "real" grandchild, and not for the other two children. He would run up to her in public and hug her and she'd ignore him. He tried for years to win her love, since her son loved my dad like his own child, but his grandmother never cared. When I was born, they took me to see her and she said that I was nothing to her. That was about the last contact my dad had with her. Do you see the difference? Children need all the loving people they can get. Mine have grandparents all over the place, but also dear, loving neighbors and dear loving church friends and great aunts who all act as grandparents, too. Sharing your child with others takes a lot of weight off your shoulders. God has given you a precious gift, and He will take care of her, so don't hold her so tight that you leave fingerprints and you'll have an easier time.