Antitrust Laws: Government Power To Break Monopolies

Antitrust laws are a collection of mostly federal laws that govern the conduct and organisation of businesses to promote economic competition and prevent unjustified monopolies. In the United States, the three main antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These laws aim to promote fair competition and prevent unfair business practices that could harm consumers. They prohibit anticompetitive conduct and mergers that deprive consumers of the benefits of competition, such as higher prices, fewer choices, lower wages, and reduced quality.

The government can break up firms that have become monopolies or prevent mergers that would form monopolies. For example, in 1911, the Supreme Court ordered the break-up of the Standard Oil Company, which had violated the Sherman Act by building a monopoly in the oil business through economic threats against competitors and secret rebate deals with railroads. More recently, in 2023, the Department of Justice and eight states filed an antitrust lawsuit against Alphabet's Google, alleging that it had illegally monopolised the digital advertising business.

Price-fixing

The penalties for price-fixing can be severe, with individuals and companies facing criminal prosecution, hefty fines, and imprisonment of up to ten years. To prevent and deter price-fixing, the FBI and other federal law enforcement agencies routinely investigate suspected cases, and the FTC may bring civil enforcement actions.

In recent years, there has been a growing concern over the use of algorithms by companies to engage in algorithmic price-fixing, where competing companies delegate their pricing decisions to an algorithm without explicitly agreeing to fix prices. To address this, the proposed Preventing Algorithmic Collusion Act aims to close this loophole by presuming a price-fixing "agreement" when direct competitors share non-public information through a pricing algorithm to raise prices.

Bid-rigging

An example of bid-rigging is when three school bus companies formed a joint venture to provide transportation services under a single contract with a school district. In reality, the joint venture was a means to prevent the bus companies from offering competing bids. In another case, a community college was expanding its campus and awarded construction work through multiple rounds of competitive bids. Three construction companies decided in advance to "take turns" winning the business and rotated which company submitted the lowest bid, with the other two companies submitting higher, intentionally losing bids. The Federal Bureau of Investigation investigated, and the Department of Justice prosecuted this bid-rigging conspiracy.

Market allocation

Antitrust laws are a body of laws that aim to regulate the competitive landscape of a market and promote fair practices. One of the key tools available to the government under these laws is the ability to break up companies that are deemed to have gained too much market power or are engaging in anti-competitive behaviour. Market allocation, or customer allocation, is one of the practices that can lead to government intervention and the breakup of a company.

Monopolies

Antitrust laws are designed to prevent monopolies from forming and to break up those that exist. A monopoly occurs 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 Sherman Antitrust Act, passed in 1890, is the core of antitrust policy in the United States. The Act makes it illegal to restrain trade or form a monopoly. It gives the Justice Department the power to go to federal court to stop illegal behaviour or impose remedies. The Act also lays out specific penalties and fines for violating the terms.

The Clayton Antitrust Act of 1914 addresses specific practices that the Sherman Act does not ban. For example, the Clayton Act prohibits appointing the same person to make business decisions for competing corporations and restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly.

The Federal Trade Commission Act, also passed in 1914, bans unfair competition methods and deceptive acts or practices.

These three laws are still the core federal antitrust laws in effect today, although they have been revised and amended for more specificity.

Antitrust laws are enforced by the Federal Trade Commission (FTC) and the Department of Justice (DOJ). The FTC mainly focuses on segments of the economy where consumer spending is high, such as healthcare, pharmaceuticals, and food, while the DOJ holds sole antitrust jurisdiction in sectors such as telecommunications, banks, railroads, and airlines and has the power to impose criminal sanctions.

In recent years, there has been a wave of antitrust actions and proposed legislation, particularly in the tech industry, which will likely reshape the business and regulatory landscape, impacting both businesses and consumers.

Mergers and acquisitions

Of particular concern are horizontal mergers between direct competitors. Mergers can negatively impact competition and change market dynamics, leading to higher prices, fewer or lower-quality goods or services, or reduced innovation. If firms are of a certain size or the merger deal exceeds a certain value, the companies are legally required to notify the Federal Trade Commission (FTC) or the Department of Justice (DOJ) of their plans. This enables the FTC or DOJ to review the potential effects of the merger on the market.

Vertical mergers occur along the supply chain, such as when a manufacturer merges with a supplier or distributor. While these mergers can result in significant cost savings and improved manufacturing and distribution coordination, they may also hinder competitors' access to important components or distribution channels.

Antitrust laws aim to prevent mergers and acquisitions that could substantially lessen competition or create monopolies. The Clayton Act of 1914, for instance, prohibits mergers and acquisitions that may substantially lessen competition or tend to create a monopoly.

In recent years, there has been a wave of antitrust lawsuits and proposed legislation targeting large companies, particularly in the tech industry. Notable examples include the DOJ's antitrust lawsuit against Google in 2023, the FTC's ongoing case against Facebook, and the DOJ's lawsuit to block the merger between US Sugar Corporation and Imperial Sugar Company in 2021.

Frequently asked questions