Breaking Monopolies: Antitrust Laws And Their Impact

The Sherman Antitrust Act of 1890 was the first federal act that outlawed monopolistic business practices. It was based on the constitutional power of Congress to regulate interstate commerce. The act prohibits conspiracies that unreasonably restrain trade and 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 Antitrust Act of 1914 also prohibits anticompetitive price discrimination and mergers that are likely to harm competition. It empowers the Department of Justice and the Federal Trade Commission to sue to block anticompetitive mergers.

These laws, enforced by the Department of Justice and the Federal Trade Commission, aim to promote fair competition and prevent unfair business practices that could harm consumers.

Monopolies are not always illegal

In the United States, antitrust law is a collection of mostly federal laws that govern the conduct and organisation of businesses to promote economic competition and prevent unjustified monopolies. The three main US antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914.

The Sherman Antitrust Act was the first federal act to outlaw monopolistic business practices. It was based on the constitutional power of Congress to regulate interstate commerce. The Act makes it illegal to try to restrain trade or to form a monopoly. It gives the Justice Department the mandate to go to federal court to stop illegal behaviour or impose remedies.

The mere existence of a monopolistic market share is not illegal. For example, Microsoft controls about 90% of the home PC market. This is not a violation of antitrust laws because having a large market share does not, in itself, imply behaviour that restrains competition.

Monopolies are illegal if they are established or maintained through improper conduct, such as exclusionary or predatory acts. This is known as anticompetitive monopolisation. Anticompetitive monopolisation violates federal antitrust law, notably the Sherman Antitrust Act, and is also prohibited by state antitrust law.

Under federal and some state laws, private parties (businesses or consumers) who have been harmed by anticompetitive conduct can bring antitrust lawsuits seeking damages and injunctive relief.

Unfair business practices

The Sherman Antitrust Act prohibits "every contract, combination, or conspiracy in restraint of trade," as well as monopolization, attempted monopolization, or conspiracy to monopolize. This includes agreements among competitors to fix prices or wages, rig bids, or allocate customers, workers, or markets. The Act also makes it illegal to monopolize or attempt to monopolize a market through anticompetitive behaviour. An unlawful monopoly exists when a firm has market power and has obtained or maintained that power by suppressing competition.

The Clayton Antitrust Act prohibits anticompetitive price discrimination and mergers that are likely to harm competition. It also addresses specific practices not clearly prohibited by the Sherman Act, such as interlocking directorates (when an individual sits on the boards of competing corporations), reducing competitive vigor. Section 7 of the Clayton Act prohibits mergers and acquisitions that may substantially lessen competition or create a monopoly.

• Price fixing: Agreements among competitors to fix or raise prices, which can harm consumers by leading to higher prices.
• Bid rigging: Competitors agree to manipulate the bidding process, ensuring that a desired party wins the bid.
• Market allocation: Competitors agree not to compete within each other's geographic territories or customer bases.
• Exclusive contracts: Contracts that reduce competition by giving one company exclusive rights or advantages.
• Tying agreements: A company forces customers to buy one product (the "tying" product) to purchase another (the "tied" product), limiting customer choice and competition.
• Predatory pricing: A company sets prices very low, often below cost, to drive out competitors. Once they have gained a monopoly, they can raise prices due to a lack of competition.
• Interlocking directorates: An individual sits on the boards of competing corporations, reducing competitive vigor between the companies.

These practices can harm consumers by leading to higher prices, fewer choices, and reduced quality. They can also harm workers by potentially leading to lower wages and reduced employment opportunities. Antitrust laws aim to prevent these unfair business practices and promote a fair and competitive marketplace.

Anti-competitive behaviour

The Sherman Act prohibits agreements that unreasonably restrain trade and any attempt to monopolize or conspire to monopolize. This includes price-fixing, bid-rigging, wage-fixing, and allocating customers, workers, or markets. The Act also makes it illegal to monopolize a market, with unlawful monopolies defined as when a firm has market power and has obtained or maintained that power through anti-competitive conduct, rather than competition on merit.

The Clayton Act prohibits anticompetitive price discrimination and mergers that are likely to harm competition. It also addresses specific practices not clearly prohibited by the Sherman Act, such as interlocking directorates, where an individual sits on the boards of competing corporations.

An illegal merger occurs when two companies join in a way that lessens competition or creates a monopoly. This can harm consumers by leading to higher prices and fewer choices, and workers through lower wages and reduced employment options.

Other anti-competitive practices include illegal tying agreements, where a company forces customers to buy one product to access another, and predatory pricing, where a company sets prices very low to drive out competitors and then raises them once competition is gone.

Anti-trust laws do not prohibit all monopolies, but focus on behaviour aimed at undermining competition. The laws aim to promote fair competition and prevent anti-competitive practices that could harm consumers.

Unreasonable restraint of trade

However, the broad wording of the Act has been interpreted and narrowed by courts over the years. Judges have developed principles to distinguish between "naked" trade restraints that suppress competition and other restraints that promote it. Naked restraints are anticompetitive agreements with nothing surrounding them. They are almost always done to gain supracompetitive profits from the restraint itself.

The rule of reason was introduced by the Supreme Court in 1911 in the case of Standard Oil Co. of New Jersey v. United States. The Court held that, although the Sherman Act prohibited "every" restraint of trade, it only banned those that were ''unreasonable'. The rule of reason interprets the Sherman Act to mean that the legality of most business practices will be evaluated on a case-by-case basis according to their effect on competition, with only the most egregious practices being illegal per se.

The rule of reason has been further refined over the years. In 1940, in United States v. Socony-Vacuum Oil Co., the Supreme Court refused to apply the rule of reason to an agreement between oil refiners to buy up surplus gasoline from independent refining companies. It ruled that price-fixing agreements between competing companies were illegal per se under section 1 of the Sherman Act and would be treated as crimes even if the companies claimed to be merely recreating past government planning schemes.

The Court began applying per se illegality to other business practices such as tying, group boycotts, market allocation agreements, exclusive territory agreements for sales, and vertical restraints limiting retailers to geographic areas. Courts also became more willing to find that dominant companies' business practices constituted illegal monopolization under section 2 of the Sherman Act.

In summary, what constitutes an unreasonable restraint of trade is interpreted on a case-by-case basis, but certain practices such as price-fixing are deemed so obviously detrimental that they are categorized as being automatically unlawful, or illegal per se.

Predatory pricing

Instances of a large firm using low prices to drive smaller competitors out of the market in hopes of raising prices after they leave are rare. This strategy can only be successful if the short-run losses from pricing below cost will be made up for by much higher prices over a longer period of time after competitors leave the market. Although the Federal Trade Commission (FTC) examines claims of predatory pricing carefully, courts, including the Supreme Court, have been skeptical of such claims.

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