Breaking Antitrust Law: A Guide To Unlawful Market Dominance

Antitrust laws are regulations that encourage competition by limiting the market power of any particular firm. These laws are designed to prevent companies from engaging in anticompetitive conduct and mergers that could harm consumers, workers, and taxpayers. While the specifics of antitrust law vary by jurisdiction, they generally aim to prevent monopolies, price-fixing, bid rigging, and market allocation. In the United States, the primary federal antitrust laws are the Sherman Act, the Clayton Act, and the Federal Trade Commission Act. These laws are enforced by the Federal Trade Commission (FTC) and the Department of Justice (DOJ), which investigate and penalize companies that violate antitrust regulations.

Price fixing

• If the bid or quoted price is much higher than expected, it may be due to collusion, although this is not illegal in itself.
• If all suppliers increase their prices simultaneously, it is likely due to some form of collusion rather than input cost changes.
• If a new supplier's price is lower than the usual corporate bidding price, it could be that there is collusion among existing companies.
• If a new supplier's price drops significantly after bidding, it may be that they have forced existing suppliers to compete, revealing collusion.

Bid rigging

• Bid suppression: where competitors refrain from bidding or withdraw their bid to ensure the designated winner's bid is accepted.
• Complementary bidding: also known as cover or courtesy bidding, where competitors submit unacceptably high bids or include special provisions in their bid to nullify their bids. This is the most common form of bid-rigging and is designed to create the illusion of competition.
• Bid rotation: where competitors take turns to be the lowest bidder on different contract specifications, such as contract sizes and volumes.

Market allocation

For example, if Company A operates in the Northeast and Company B does business in the Southwest, they may agree that Company A will stay out of the Southwest and Company B will stay out of the Northeast. If startup costs are high, this agreement will create a de facto monopoly for each company in their respective territories. This eliminates competition for pricing, customers, and territories. As a result, companies can charge higher prices without the risk of being undercut by competitors.

Horizontal market division schemes, or those among direct competitors, violate the Sherman Act by eliminating competition among conspiring competitors and keeping other competitors out of the market. These agreements not to compete may violate both federal and state antitrust laws.

The Federal Trade Commission (FTC) has taken action against companies found guilty of market allocation. In 2000, the FTC found FMC Corp. guilty of colluding with Asahi Chemical Industry to divide the market for microcrystalline cellulose, a primary binder in pharmaceutical tablets. As a result, the Commission barred FMC from distributing microcrystalline cellulose to any competitors for 10 years in the United States and banned the company from distributing any Asahi products for five years.

Monopolies

The U.S. has three core antitrust laws: the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These laws serve three major functions:

• Section 1 of the Sherman Act prohibits price-fixing and the operation of cartels, as well as other collusive practices that unreasonably restrain trade.
• Section 7 of the Clayton Act restricts mergers and acquisitions that may substantially lessen competition or create a monopoly.
• Section 2 of the Sherman Act prohibits monopolization.

Under these laws, several types of monopolistic behaviour can be grounds for legal action:

• Exclusive Supply Agreements: When a supplier is prevented from selling to different buyers. This stifles competition as the monopolist can buy supplies at lower costs, preventing competitors from manufacturing similar products.
• Tying the Sale of Two Products: When a monopolist ties sales of a dominant product to a second, lesser product. This forces customers to buy something they may not need and is a violation of antitrust laws.
• Predatory Pricing: When a company sets prices very low, often below cost, to drive competitors out of business. Once the competition is gone, the company can raise prices without opposition.
• Refusal to Deal: Monopolies, like any other company, can choose who they do business with. However, if they use their market dominance to prevent competition, this can be considered a violation of antitrust laws.

Antitrust laws are enforced by the Federal Trade Commission (FTC) and the Department of Justice (DOJ). These agencies focus on different sectors of the economy, with the DOJ handling infrastructure-related areas like telecommunications and banking, and the FTC focusing on consumer-related segments like healthcare, drugs, and food.

Mergers and acquisitions

An illegal merger occurs when two companies join together in a way that may substantially lessen competition or tend to create a monopoly in a given market. This can harm consumers by potentially leading to higher prices or fewer choices for products or services. It can also harm workers by potentially leading to lower wages or fewer employment opportunities.

The Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) are tasked with enforcing federal antitrust laws and preventing anticompetitive mergers. They review mergers and acquisitions to assess the risk of harm to competition, examining the totality of the evidence available. The agencies can bring suits in court to block transactions and can also impose fines and even criminal sanctions.

There are several ways in which a merger or acquisition may violate antitrust laws:

• Increasing market concentration: Mergers that significantly increase concentration in an already highly concentrated market may be deemed illegal. This is often indicated by market share and can lead to a presumption of illegality.
• Eliminating competition: Mergers that eliminate substantial competition between firms are scrutinized. This includes direct horizontal mergers between competitors, as well as vertical mergers that may reduce competitive constraints or the attractiveness of alternatives.
• Risk of coordination: Mergers that increase the risk of anticompetitive coordination between firms are illegal. This is more likely in highly concentrated markets or industries with a history of anticompetitive coordination.
• Barriers to entry: Mergers that eliminate a potential entrant or current competitive pressure from a perceived potential entrant in a concentrated market may violate antitrust laws.
• Limiting access: Mergers that create a firm that can limit access to products or services that its rivals use to compete are illegal. This includes limiting rivals' access, gaining access to sensitive information, or deterring rivals from investing in the market.
• Entrenching dominance: Mergers that reinforce or extend a dominant position in a market, tending to create a monopoly, are prohibited.

To avoid breaking antitrust laws during mergers and acquisitions, companies should be cautious when sharing competitively sensitive information (CSI) during the due diligence process. This includes price information, confidential customer data, and forward-looking market activities. Companies can establish a "clean team" to evaluate CSI without it providing value to the organization, and should consult with M&A specialists who understand antitrust laws. Merger agreements should also include antitrust provisions to protect all parties.

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