What are Antitrust Laws?

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Definition:

Antitrust laws are regulations that aim to promote fair business competition in an open market and protect consumers by banning certain predatory practices.

🤔 Understanding antitrust laws

Antitrust laws are a collection of federal and state laws in the US that benefit consumers by helping ensure lower prices, more choices, and new and better products, which all result from healthy competition. These regulations have been around for over a century. The Sherman Antitrust Act, the Clayton Antitrust Act, and the Federal Trade Commission (FTC) Act are the three key laws that lay the groundwork for antitrust law in the US. Together, these regulations help prevent anti-competitive activities like price fixing, market allocation, bid rigging, monopolies, and some types of mergers and acquisitions that would impede competition in a given industry. In the absence of these laws, consumers would likely have to pay higher prices for lower quality goods, and have a more limited selection of products and services. Since the early 1900s, the FTC and Department of Justice have enforced all antitrust laws in the US to ensure a competitive economy without too much power from any one player.

Example

Let’s go back 150 years to look at the beginning of antitrust law and one of the most famous examples that started it all. In 1870, John Rockefeller started the company Standard Oil – one of the world’s first and largest multinational corporations. Within two decades, Standard Oil owned and controlled almost all oil production, processing, marketing, and transportation in the US. This means that it was running as a monopoly (aka a company that controls or nearly controls an entire market).

After Congress passed the Sherman Antitrust Act in 1890 that outlawed unfair business monopolies, the US Supreme Court ruled in 1911 that Standard Oil was indeed an illegal monopoly and in violation of the law – The company had to cease operations and break up into many smaller companies.

Takeaway

Antitrust laws are sort of like the National Football League (NFL) preventing all of the best athletes from playing on a single team…

The NFL generally wants to make sure that there’s plenty of competition in the league. After all, who wants to watch football if one team wins every game year after year? To avoid this, the NFL uses the draft process to select players for teams in order to make the system more fair and competitive. The government does much the same thing, but for companies instead of football teams, and with antitrust laws instead of a draft. The government wants to ensure that there’s plenty of competition in the economy to protect consumers and preserve an open market – As such, the laws are designed to prevent anti-competitive behavior that would lead to dominance in a market, just like the NFL stops all the best players being on one team.

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What are antitrust laws?

Antitrust laws are regulations that governments use to protect competition in the economy. This competition leads to lower prices, innovation, and more choices – These antitrust laws apply to nearly all industries. Fair competition is achieved by prohibiting business practices that unreasonably deprive consumers from the benefits of competition. Some of these illegal practices include price fixing (i.e. two or more sellers agree on what prices to charge), bid rigging (i.e. two or more firms agree on who will win a bid), and customer allocation (i.e. an arrangement between competitors to split up customers by some factor like geographic area).

In the US, antitrust laws are a collection of federal and state regulations that are enforced by the Federal Trade Commission (FTC) and the US Department of Justice (DOJ). Generally, the DOJ enforces the law in the case of a criminal complaint and the FTC enforces the law in the case of a civil complaint. Civil violations may result in restitution, meaning that the company has to pay damages to victims. Criminal violations, however, could mean prison time or criminal forfeitures (i.e. the government confiscating assets).

What is the purpose of antitrust laws?

Antitrust laws in the United States attempt to ensure fair competition in every industry. While the US generally operates a free enterprise (aka a free market without government interference), there are times when this system can be harmful to consumers.

Free and fair competition is often seen as beneficial for consumers because it generally results in more competitive (i.e. lower) prices, better quality products and services, and more choices. A highly competitive market also typically encourages innovation – Healthy competition pushes companies to develop new and better goods to entice consumers and gain market share.

When the free market does not result in fair competition, it can be harmful to consumers. Prices may go up, and quality could go down. They may have only one provider option (in the case of a monopoly) for a given good.

For example, in 2001, the US government found Microsoft guilty of acting as a monopoly when it prevented PC manufacturers and consumers from installing web browsers other than Internet Explorer onto their computers. Over the past century, the US government has relied on antitrust laws to help prohibit anti-competitive behavior like this and safeguard consumers.

What are the antitrust laws in the United States?

There are three primary federal antitrust laws that exist in the US to address the issue of unfair business competition.

The first regulation, the Sherman Antitrust Act, passed in 1890. The Sherman Act prohibits companies from making deals with their competitors to limit competition. This law addresses behaviors including market allocation schemes, price fixing, and bid rigging. The act also bans monopolies in cases where a company has used unfair and anti-competitive practices to acquire that monopoly.

The Clayton Antitrust Act was passed in 1914 to close loopholes that companies were using to get around the current antitrust laws. Since the Sherman Act had banned certain collaborative practices, some companies began turning to mergers and acquisitions instead. The Clayton Act put more stringent regulations around this practice.

While the Sherman Act and the Clayton Act created the antitrust laws, the Federal Trade Commission (FTC) Act created the enforcement mechanism. Congress passed the FTC Act in 1914 to create the Federal Trade Commission to enforce the nation’s antitrust laws – This government agency still exists and oversees antitrust laws today.

What practices do antitrust laws prohibit?

Price Fixing

Price fixing occurs when two or more competitors in a market agree on what prices to charge. For example, two companies may agree that they will increase prices by a certain amount or that they won’t sell below a certain price.

Under normal circumstances, current market forces dictated by the law of supply and demand for a particular product naturally sets the price for it. Commonly, this can result in a similar or even identical price for a good across competitors as a result of standard market behavior. For example, if consumer demand skyrockets for, say, bread machines, then this may increase the price of bread machines across the board without any collusion between competitors. Therefore, it can be tough to know whether price fixing took place. A market-wide change in price could appear to be price fixing, but may ultimately be a response to some other market forces.

Market Allocation

Market allocation is a type of criminal antitrust law violation where competitors in a particular market agree to divide it amongst themselves. They often decide to split the customer base by characteristics like demographics (e.g., age, gender, socioeconomic status) or geography.

For example, suppose there are two major construction companies in a state. The two firms currently get the majority of construction business, and they want it to stay that way.

In a market allocation scheme, the two companies might agree that Company A will take on jobs only in particular industries, such as agriculture and mining. Company B will only accept jobs in the remaining sectors, such as retail and healthcare. This agreement ensures that the two companies will never bid against each other. Market division violations also often occur on a regional basis, meaning that companies agree to divide business by geography.

Bid Rigging

Bid rigging occurs when multiple companies structure the bidding process for a contract in such a way that they agree on which firm will win each bid ahead of time.

Suppose that there are two big information technology (IT) firms in a single city. Both the local hospital and local school district put out a request for proposal (RFP) for a company to update the entirety of their IT infrastructure.

If the two IT firms were to engage in a bid rigging scheme, they might decide in advance which company would win each bid and, therefore, what price each company would bid at to ensure that outcome. In this case, the two companies would be manipulating the process to guarantee that each one maintains a steady share of the IT market in their town.

Mergers and Acquisitions (M&A)

A merger happens when two firms join forces to operate as a single company. An acquisition occurs when one company purchases part or all of another. M&A is often legal and a routine part of business operations and strategy.

However, under federal law, a merger or acquisition is illegal when that transaction may substantially lessen competition, or create a monopoly, according to the Federal Trade Commission (FTC). So if the companies in question would intentionally (or unintentionally) create a dominant power with little or no competition in the industry, then it isn’t allowable.

The FTC indicates that M&A raises the most red flags regarding antitrust when it is two direct competitors trying to join forces. While this activity is not always illegal, the FTC still requires that the companies file paperwork for review before they can move forward with the deal.

What are monopolies?

A monopoly exists when one company controls all or almost all of a market. Monopolies are generally disadvantageous for consumers because they often allow the dominant company to set its prices higher than they otherwise could in a competitive market.

Monopolies can come about for several reasons. First, a market may have such a high barrier to entry – an obstacle that makes it difficult to enter a market – that no other firm can compete. These barriers often result in natural monopolies. Some industries are particularly prone to natural monopolies and, in some cases, it might not even make sense to have any competitors in the market. For example, it wouldn’t make sense for two utility companies to put up power lines to provide electricity to people in a given area. This resultant monopoly of one utility company isn’t illegal, but it is typically heavily regulated by the government so that the company doesn’t take advantage of its customers.

Next, monopolies can be the result of a single company intentionally acquiring other competitors so that it can have sole control of its industry.

Finally, a company may create a monopoly by using aggressive tactics, such as exclusive supply agreements and predatory pricing, to keep other companies out of the market.

Under federal law, it is illegal for a company to monopolize or attempt to monopolize an industry. Over the years, US courts have generally ruled that for a company to have an unlawful monopoly, it must use unreasonable methods. The key factor that courts use to determine whether a method is unreasonable is whether a legitimate business justification exists for it.

What are the different types of monopolistic behavior?

There are plenty of strategies that companies might use to acquire a larger market share in their sector or maintain a monopoly they already have.

The Federal Trade Commission (FTC) has identified a few specific practices they often consider to be illegal monopolistic behavior.

Exclusive supply agreements

An exclusive supply or purchase agreement happens when the firm buying a product makes a deal with its supplier mandating that they won’t supply that good to anyone else. Though exclusive supply agreements are generally legal, they can be illegal if they exist to prevent new competitors from breaking into a market.

Suppose that five companies provide espresso makers to the retail industry. One retailer might enter into an exclusive supply agreement with one of the espresso maker suppliers so it is the only retailer that can sell that particular machine. This activity probably wouldn’t be deemed illegal.

But now suppose that the retailer not only established one exclusive supply agreement, but also entered into a similar deal with all five suppliers of espresso makers. This situation would be an example of illegal monopolistic behavior since that retailer is actively trying to prevent any other retailer from being able to sell a similar product.

Tying the sale of two products

Another example of illegal monopolization is when a company links the purchase of two different products that it sells. In this case, a company takes two products that it should sell separately and offers them as a package deal. This practice is one that a company with a large share of the market in one industry might use to pick up more market share in a separate sector.

For example, this happened when the drugmaker Sandoz Pharmaceuticals Corp. sold its treatment for schizophrenia and blood-monitoring services as a package deal. This practice was unfair to the consumers who needed only the schizophrenia medicine, as the packaging of the products increased the total price. The FTC also ruled that it was a monopolistic behavior because it prevented other companies from being able to sell blood-monitoring services to these patients.

Predatory pricing

Predatory pricing happens when a company sets its prices below the current market price to increase its sales. While this might seem positive for consumers, it’s only half of the story.

First, the company usually reduces its prices to less than the fair market price. Competitors in that market can’t sell their product for this low price and simultaneously maintain a profit. Because other sellers can’t match the price, all consumers buy from the company with the lowest prices. This causes its competitors to eventually go out of business.

Once the other competitors have left the market, the company that priced its products below market value now has a monopoly. The company can then drastically increase its prices above the old fair market value.

In the short run, this scheme might seem beneficial for consumers, but in the long run, it’s a predatory tactic that generally harms consumers.

Refusal to deal

Refusal to deal occurs when a company gives its business partners an ultimatum: Stop doing business with my competitors, or you can no longer do business with me.

Suppose there are three steakhouses in a small city. One of the steakhouses orders about 60 percent of a supplier’s steak. This steakhouse – the largest – then tells the supplier that if they continue to sell to the other two steakhouses in the market, the restaurant will take its business elsewhere. The supplier likely doesn’t want to lose more than half its business, so it may agree.

This type of behavior is monopolistic because one company is making an intentional effort to restrict competition and make it harder for other firms in the market to do business.

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