This article is written by Sachi Bhiwgade. It discusses various aspects of antitrust laws in the United States of America. It also covers discussions regarding various antitrust laws in the United States, their requirements, key concepts, and the various approaches taken by schools of thought to reform antitrust laws.
It has been published by Rachit Garg.
Antitrust laws are crucial for ensuring that businesses competing in the same market have a level playing field to succeed and for preventing some of them from amassing excessive power to hinder competition.
But have you ever wondered why these regulations, which safeguard competition in the market, are referred to as “anti-trust?” Let’s look at how the American antitrust laws came to be. In the 1800s, multiple businesses and corporations in the United States formed “trusts” by combining their interests in a single entity and exploiting legal loopholes to grow larger and control an entire market, such as coal or railway. To prevent these trust corporations, the federal government responded by enacting anti-trust laws. This does not, however, imply that antitrust laws are opposed to large corporations or businesses. Antitrust laws were literally enacted to prevent these trusts from gaining concentrated economic power and undermining competition. It focuses on free trade and ensures competitive conditions in a market.
This article outlines key facets of the United States’ antitrust laws, including their essential concepts and how they have evolved over time in response to market changes with significant rulings.
Need for antitrust laws
It is imperative to understand what would happen if there were no antitrust laws. Does the existence of antitrust laws even make a difference? Consider this from the perspective of a new business or seller. In a market, say, for oil and petroleum, the dominant and powerful firms would not allow a new entrant to sell its product and would obviously want to have their own monopoly in that area. This will create an entry barrier for the new business that wants to enter the market. At the same time, due to the presence of monopolies, the firms will end up setting unjust prices without any concern for maintaining the quality of the products. From the perspective of a buyer or consumer, their options for goods and services would be limited, and they would be compelled to buy at the whim of the seller. The main objective of antitrust law is to regulate market competition and ensure free trade and commerce. It is essential to ensure that consumers do not fall prey to unlawful overcharging or be deprived of any perks of competition. Without antitrust laws, consumers would ultimately have fewer options and lesser choices.
Understanding the essential concepts of antitrust laws
Below are a few essential concepts and principles of antitrust laws.
Freedom of entry
Freedom of entry means a new entrant is able to enter any market where sellers and buyers are free to interact without being hindered by any other business.
A relevant market is one where similar goods and services are offered for sale to consumers within a geographical territory. The purpose of determining a relevant market is to identify businesses that are directly competing with each other.
Abuse of dominance
It happens when a business or group of businesses try to abuse their position to control a sizable portion of a market. It is a unilateral action taken to evade market competition. Such conduct, among other things, might involve influencing market prices, exclusive dealing, or refusing to deal.
A monopoly is characterized by a single company that sells a unique product with no direct competitors in the market.
Cartel is an arrangement between business competitors whereby they agree to limit production, fix prices, rig bids, share consumers, or impose any other form of restriction in an attempt to thwart competition.
Competitors in a cartel are not interested in engaging in competition with each other, but they devise strategies upon which each cartel member will act instead, avoiding the need for them to offer better goods or services at competitive prices.
The market will be divided and assigned among competitors, for example, a certain territory or segment of customers. Due to the fact that it is an “agreement not to compete,” such a practice is detrimental to competitiveness.
Market share is the percentage of an industry’s total sales that a specific company has had over a given period of time.
Bid rigging is an illegal collusive practice where businesses conspire to determine who will win the bid (contract). These companies will select among themselves who will purposely make lower and higher bids in order to lose and win, respectively. Sometimes an offer is even withdrawn in order to get the bid of the predetermined winner, or you make an unreasonable higher bid, etc.
Anti-competitive agreements are made between business competitors with the intention of limiting competition by preventing new entrants or regulating the production and supply of commodities. They could be both vertical and horizontal. Whereas, in a horizontal agreement, competing businesses that are producing at the same level in the same industry fix or restrict supply. Vertical agreements, on the other hand, involve competing businesses that are at different stages of the production or distribution process. Examples of anti-competitive agreements include exclusive dealings, tying and bundling, price fixing, refusal to deal, etc.
Per se rule
The per se rule implies a presumption of adverse effects on competition. Under this rule, any conduct or arrangement that would be prohibited by the antitrust laws and would fall into one of the categories listed in the statute is anti-competitive, irrespective of whether or not it actually benefits customers.
The basis of this rule was explained by the Supreme Court in the case of Northern Pacific Railway v. United States (1958), where it states, “This principle of per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable—an inquiry so often wholly fruitless when undertaken.”
Rule of reason
In contrast to the per se rule, according to the rule of reason, courts will inquire about and examine a business’s conduct and look into how such conduct impacts competition before deciding whether or not it violates antitrust laws.
US antitrust legislations and their applicabilities
The US Federal Government has three core antitrust statutes: the Sherman Act, the Clayton Act, and the Federal Trade Commission Act. These laws are codified in Title 15 of the United States Code. The Federal Trade Commission (FTC) and the United States Department of Justice (DOJ), Antitrust Division, are the enforcers of antitrust laws in the United States, having the common mission of promoting economic competition by enforcing antitrust laws in the US. This section of the article discusses the key elements of these three statutes.
Sherman Antitrust Act, 1890
The first antitrust law in the US was the Sherman Antitrust Act of 1890, enacted broadly to prevent the dominant trusts from destroying competition and passed by the US Congress. This Act covers provisions regarding trusts, anti-competitive agreements, and monopolies and empowers the Department of Justice to prosecute in cases of violation of the Act.
The nature of the Sherman Act was described by the US Supreme Court as a “comprehensive statute” in the case of Northern Pacific Railway, where it was observed that “The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions. But even were that premise open to question, the policy unequivocally laid down by the Act is competition.”
Section 1 and Section 2 are the principal sections of the Sherman Act that impose both civil and criminal liabilities. Section 1 of the Act penalizes any person involved in a contract, combination, or conspiracy that restrains trade or commerce with a fine and imprisonment if found guilty. Section 2 forbids monopolization, combination, as well as conspiracy if any person is found to be violating the provision.
Issues with the Sherman Act
The Act had a number of flaws, and the US Supreme Court decided to invalidate it in the case of United States v. E. C. Knight Company in 1895, five years after it was passed. Due to the statute’s unclear writing, it was impossible to distinguish between what was allowed and what was prohibited. It lacked definitions for terms like “trust” and “monopoly.” The vague language of the Act made it possible for companies to dominate and carry on with practices that stifled competition, which had a considerable negative impact on small businesses and frequently resulted in their closure.
Clayton Antitrust Act, 1914
Since the Sherman Act had failed to govern competition issues effectively due to its ambiguous language and loopholes, the Clayton Antitrust Act was enacted in 1914 to curb unfair competition practices in the US. The Clayton Act incorporated provisions for boycotts, strikes, labor unions, and other issues that were not addressed in the Sherman Act, thus, supplementing the Sherman Act, which is also indicated in the preamble of the Clayton Antitrust Act, which says “An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes”
Key provisions of the Clayton Antitrust Act
- Section 2 of the Act forbids price negotiation between various buyers. No business may, in accordance with this Section, impose different prices for the same goods or services, which may lead to harming competition in the market. This Section was further amended by the Robinson Patman Act in 1936 to amend the statute further.
- Section 3 covers provisions related to practices that create or attempt to create a monopoly. This Section forbids entering into any agreement or understanding if the result of such agreement or understanding could significantly reduce competition or contribute to creating a monopoly.
- Section 7 deals with mergers and acquisitions. It prohibits merger and acquisition activity that could substantially lessen competition.
- Section 7A deals with mergers and acquisitions combined to create a monopoly by purchasing their competition or having an adverse effect on the economy. It mandates the filing of pre-merger notification by businesses that meet the financial threshold with the FTC and DOJ Antitrust Division.
- Section 6 deals with the exemption under the Act. Human labour, agricultural and horticultural operations, as well as their related organization, are not considered to be violative of the Act and are therefore not subject to liability. Therefore, boycotts, strikes, etc. are exempt from the purview of the Clayton Act.
- The Clayton Antitrust Act was modified to have a suspensory impact on mergers and acquisitions. This was done by way of the Hart Scott Rodino Antitrust Improvement Act of 1976.
- Section 7 was further amended by the Celler Kefauver Act, 1950. Prior to the amendment, the provision prohibited stock acquisition that “may substantially lessen competition between such corporations” that are parties to the acquisition. After the 1950 amendment, the provision prohibited stock acquisition that “may substantially lessen competition… in any line of commerce in any section of the country.”
- Under Section 4, private parties have the right to bring lawsuits and seek triple damages for any injury forbidden by the Act.
Federal Trade Commission Act, 1914
The Federal Trade Commission was created by the Federal Trade Commission Act, 1914, in the US, empowering the commission to take action against unfair competition practices, prescribe rules, gather and compile information about organizations, order cease and desist, and conduct investigations into fraud and premerger filings, among other things.
Key provisions of the FTC Act
- Section 4 contains definitions of various terms, such as commerce, corporation, documentary evidence, Acts to regulate commerce, antitrust Acts, and banks.
- Section 5 deals with the protection of consumers in case of unfair and deceptive acts and unfair means of competition by businesses and declares these practices as unlawful.
- Sections 6, 9, and 20 deal with certain investigative powers of the FTC.
Theories of antitrust laws
The scholars at the Harvard School already assumed the illegality of firms having market power. Scholars at Harvard argued that “when markets are concentrated, firms are more likely to engage in anti-competitive conduct.” To elaborate, as per these scholars, any merger, joint venture, or any other agreement that enabled businesses to strengthen or exercise market power is anti-competitive, irrespective of how much consumers could benefit from reduced prices as a result of such behavior.
United States v. Aluminum Co. of America (1945) is an excellent example of this. Aluminum producer Alcoa was charged with monopolizing trade in the production and sale of aluminum. It was contended by Alcoa that if it were to be determined as a monopoly, it was justified as, in doing so, it performed better than any other existing company via improved efficiencies. Alcoa was able to provide quality products at competitive prices to its consumers by expanding production capacity to keep up with rising demand. The Court, however, did not side with Alcoa and determined that the conduct of Alcoa in indulging in competition and offering consumers lower prices was in fact anticompetitive and illegal.
The downside of this approach was that the courts were very quick to condemn the competition among firms with market share, even though such competition might actually benefit consumers. Though the Harvard School presumed the illegality of firms before inquiry, it had certain upsides too, such as that the firms were able to anticipate what conduct needed to be avoided and refrain from engaging in activities leading to the increased concentration levels in the market.
Harvard School and per se rule
The per se rule was preferred by the proponents of the Harvard School because it enabled them to reduce the costs and time for antitrust trials while also preventing businesses from engaging in anticompetitive behavior.
The Chicago School emerged in the 1970s and 1980s and was founded by a group of economists and lawyers who were associated with the University of Chicago. This school of thought supported a laissez-faire economy. It was argued by the proponent of this school that the market should be left to function on its own rather than with government intervention. Supporters of the Chicago School advocated “consumer welfare” and did not presume that businesses were anti-competitive, as opposed to the Harvard School. Instead, they investigated a business’s conduct toward consumers before determining it was illegal. Their approach was more inclined towards empiricism and determining actual anticompetitive conduct by a specific business.
The Chicago School criticized the Harvard School approach. Robert Bork, one of its proponents, claimed that the sole purpose of antitrust laws was to enhance the effectiveness of the US economy. In his paper Legislative Intent and the Policy of the Sherman Act, he defined economic efficiency as “conditions that maximize wealth” and linked wealth maximization with “consumer welfare,” which he defined as “lower costs, reduced prices, and increased output of products and services desired by customers.”
It was in the late 1970s that the Chicago School’s influence was felt. The courts now did not presume illegality on the face of it but insisted on carrying out inquiries and verification of particular anticompetitive effects before ruling any conduct by a business as unlawful. Owning significant market power was no longer sufficient, and empirical evidence that a particular activity of the business in question adversely affected consumers was considered.
As a result, judges took a lax approach, enabling firms to acquire and use market share. This was also the downside of the Chicago School because no business could now tell whether the behavior was barred as anti-competitive, as was the case with the Harvard School.
Which approach was more effective?
Harvard School was skeptical, believing that any firm achieving market power was only illegal. The Chicago School, on the other hand, was very lenient. In the case of California Dental Association v. Federal Trade Commission (1999), often known as the “major antitrust event,” the Supreme Court attempted to bridge the antitrust gap between the two schools of thought. The Court observed, “There is always something of a sliding scale in appraising reasonableness, but the sliding scale formula deceptively suggests greater precision than we can hope for… Nevertheless, the quality of proof required should vary with the circumstances.” In other words, by allowing various levels of scrutiny to conduct, the court demonstrated its willingness to adopt a strategy that integrates the best from both schools.
The most important benchmarks since the inception of antitrust laws in the 1890s have been the decisions made by the US Supreme Court. Let’s analyze the landmark rulings in US antitrust law history under the following headings:
Rule of reason
Standard Oil Company of New Jersey v. United States (1911)
This is a landmark case in terms of the “rule of reason” principle. The facts of the case were that the Standard Oil Company was a conglomerate, against which there were allegations by the US Government of monopolizing the oil and petroleum industries. There were allegations against the company that it was trying to undermine competition by engaging in anticompetitive practices such as unreasonable trade restraints, acquiring the majority of oil refineries in Cleveland, creating a monopoly to eliminate competition, and violating the Sherman Act.
The Court considered the definition of restraint and found that monopolistic behavior was an instance of unreasonable restraint, which may have three different effects: high prices, less output, or low quality.
With regard to the rule of reason, the court determined that it would be up to the court to decide whether an organization grew in size through legitimate or illegitimate means. If a company is able to maintain its size by competing fairly, then such an organization would be allowed to function as it is. However, if it is proved that an organization engaged in unfair means to increase its size, then it will be ordered to be broken up. Thus, the Supreme Court ordered Standard Oil to be divided into different businesses.
Chicago Board of Trade v. United States (1918)
The Supreme Court in this case from 1918 applied the principle of the rule of reason, where the Court observed that the true test of the legality of trade restraints is “whether the restraint is such that it merely regulates, and perhaps thereby promotes, competition, or whether it is such as may suppress or even destroy competition.” And in order to determine it, it is imperative to consider the fact that the business applied the restraint, the pre-and post-restraint conditions, and the actual and probable effect of the restraint.
Per se rule
United States v. Trenton Potteries (1927)
The defendants, in this case, were 43 individuals and corporations that had 82% of the pottery and bathroom fixture production in the US and were engaged in price-fixing. The Supreme Court held them guilty of price fixing and stated that agreements to set prices are illegal “without the necessity of minute inquiry as to whether a particular price is acceptable or unreasonable as fixed.” Price fixing involves the ability to control and set any price arbitrarily.
United States v. Microsoft Corporation (1999)
The case of Microsoft is a landmark and a well-known example when it comes to monopoly. Microsoft Corporation was charged with multiple violations of the Sherman Act, and the main issue before the court was whether Microsoft was monopolizing and violating the provisions of the Sherman Act. It was claimed that Microsoft had established a monopoly in the personal computer market by combining its Windows operating system as a requirement, making it challenging for customers to install software from competing firms, and providing its internet browser, Internet Explorer, free of cost, which caused its direct competitor Netscape to go out of business, leading to market concentration. Ultimately, the Supreme Court held Microsoft guilty of monopoly and violating the Sherman Act.
Brown Shoe Co v. United States (1962)
Brown Shoe was another landmark case related to antitrust law. In this case, the government claimed that the acquisition of Kinney by Brown Shoe Co. violated Section 7 of the Clayton Act and would hamper competition in the shoe manufacturing and retail sectors. The US Supreme Court in this case delivered a unanimous decision holding that acquisition violated Section 7 of the Act.
In this decision, the court’s observation on assessing the probability that mergers may have anti-competitive effects is crucial. Thus, in the language of the court, “Statistics reflecting the shares of the market controlled by the industry leaders and the parties to the merger are, of course, the primary index of market power; but only a further examination of the particular market; its structure, history, and probable future, can provide the appropriate setting for judging the probable anticompetitive effect of the merger.”
United States v. Von’s Grocery Co. (1966)
This is another case of a Section 7 Clayton Act violation. Von’s Grocery Company and Shopping Bags Food Stores were both sizable retail grocery corporations in the US. The acquisition of Shopping Bags Food Stores by Von’s Grocery was contested by the government, as this acquisition had a combined market share of 75% and was said to be a violation of the Clayton Act. The US Supreme Court held this transaction to be violative of Section 7. The court observed that this case is a perfect example of two dominant companies joining forces to expand their combined strength, which results in concentration, which the government intends to prohibit.
The bottom line of antitrust law is to ensure fair competition in the market and safeguard consumers. Antitrust law jurisprudence in the United States is extensive and has evolved and progressed over time as a result of numerous statutes, diverse schools of thought, amendments, and court rulings. The antitrust laws of the US are also known for having a robust competition law framework, which has come a long way since its inception in the 1900s. Without these laws, there would be no competition in the market, and small businesses would be absorbed by the big ones, resulting in fewer options for consumers, higher prices, and little to no innovation, among other things.
Frequently asked question (FAQ)
Do federal antitrust laws apply to all states in the US?
Although all of the United States is subject to federal antitrust laws, many states also have their own antitrust laws that are subject to state enforcement.
- Legislative Intent and the Policy of the Sherman Act: The Journal of Law and Economics: Vol 9 (uchicago.edu)
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