Antitrust Laws: Do Earned Monopolies Get A Pass?

The term antitrust comes from 19th-century American industrialists' practice of using trusts—legal arrangements where someone is given ownership of property to hold solely for another's benefit—to consolidate separate companies into large conglomerates. In the United States, antitrust law is a collection of mostly federal laws that regulate the conduct and organization of businesses to promote competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These laws serve three major functions: First, Section 1 of the Sherman Act prohibits price-fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.

Bid rigging

Individuals and companies that knowingly enter into bid-rigging agreements are routinely investigated by the FBI and other federal law enforcement agencies and can face criminal prosecution. Potential penalties include lengthy terms of imprisonment (up to ten years) and substantial fines (up to $1 million for individuals and $100 million for companies, or twice the gain or loss from the offense). The FTC may also bring a civil enforcement action in appropriate cases.

Some examples of bid rigging include:

• Three school bus companies formed a joint venture to provide transportation services under a single contract with a school district. The FTC found that the joint venture did not involve any beneficial integration of operations that would save money and was primarily formed to prevent the bus companies from offering competing bids.
• Three construction companies decided in advance that they would "take turns" winning construction work for a community college's campus expansion, rotating which company submitted the lowest bid while the other two companies submitted higher, intentionally losing bids. This bid-rigging conspiracy was investigated by the FBI and prosecuted by the Department of Justice.

Price fixing

A naked agreement among competitors to fix prices is almost always illegal, whether prices are specified at a minimum, maximum, or within some range. Illegal price fixing occurs whenever two or more competitors agree to take actions to raise, lower, maintain, or stabilize the price of any product or service.

Price-fixing schemes are often worked out in secret and can be hard to uncover. However, an agreement can be discovered from "circumstantial" evidence. For example, if direct competitors have a pattern of unexplained identical contract terms or price behaviour together with other factors (such as the lack of legitimate, independent business explanation), unlawful price fixing may be the reason.

Monopolies

The core of U.S. antitrust legislation was created by three pieces of legislation: the Sherman Anti-Trust Act of 1890, the Federal Trade Commission Act, and the Clayton Antitrust Act. These laws prohibit anticompetitive conduct and mergers that deprive American consumers, taxpayers, and workers of the benefits of competition.

The Sherman Act makes it illegal to monopolize, conspire to monopolize, or attempt to monopolize a market for products or services. An unlawful monopoly exists when one firm has market power for a product or service, and it has obtained or maintained that market power not through competition on the merits, but because the firm has suppressed competition by engaging in anticompetitive conduct.

The Clayton Act addresses specific practices that the Sherman Act does not clearly prohibit, such as mergers and interlocking directorates. Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect "may be substantially to lessen competition, or to tend to create a monopoly".

Antitrust laws are applied to a wide range of questionable business activities, including market allocation, bid rigging, price fixing, and monopolies.

Regulators must also ensure monopolies are not borne out of a naturally competitive environment and that market share has been gained simply through business acumen and innovation. It is only the acquisition of market share through exclusionary or predatory practices that is illegal.

Below are a few types of monopolistic behaviour that can be grounds for legal action:

• Exclusive supply agreements: These occur when a supplier is prevented from selling to different buyers. This stifles competition against the monopolist as the company will be able to buy supplies at potentially lower costs and prevent competitors from manufacturing similar products.
• Tying the sale of two products: When a monopolist has dominance in the market share of one product but wishes to gain market share in another product, it can tie sales of the dominant product to the second product. This forces customers for the second product to buy something they may not need or want and is a violation of antitrust laws.
• Predatory pricing: Often hard to prove, and requiring a careful examination on the part of the FTC, predatory pricing can be considered monopolistic if the price-cutting firm can cut prices far into the future and has enough market share to recoup its losses down the line.
• Refusal to deal: Like any other company, monopolies can choose who they wish to conduct business with. However, if they use their market dominance to prevent competition, this can be considered a violation of antitrust laws.

Predatory pricing

The practice of predatory pricing can be broken down into four steps:

• A company cuts its prices to below its own costs to force competitors out of business.
• Once the competition is gone, the company raises its prices because it has less or no competition left.
• This practice harms competition and, in the long run, results in higher prices for consumers and lower wages for workers.
• New competitors will eventually emerge, but high barriers to entry such as large upfront investments, requirements in infrastructure, and exclusive agreements with distributors, customers, and wholesalers will make it difficult for any new competitors to enter the market.

Mergers and acquisitions

In the United States, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. The Federal Trade Commission and the Justice Department can file lawsuits to block or invalidate unlawful mergers.

In the case of United States v. Microsoft Corporation (1999), a coalition of 19 states and the federal Justice Department sued Microsoft. The trial court found that Microsoft had strong-armed many companies in an attempt to prevent competition from the Netscape browser and ordered the company to split in two. However, Microsoft appealed and settled with the government, with the latter dropping the case in return for Microsoft agreeing to cease many of its challenged practices.

Another example of a merger that led to antitrust concerns is the proposed merger between Sysco Corp and U.S. Foods Inc., which was blocked on the grounds that it would create an entity so large and powerful that it would stifle competition and create a monopoly.

Overall, mergers and acquisitions can be a powerful tool for creating monopolies and reducing competition, and are therefore subject to antitrust scrutiny and regulation.

Frequently asked questions