Antitrust Legislation

What It Means

Antitrust legislation refers to a set of laws meant to protect consumers and society by ensuring that businesses do not unfairly dominate their individual industries. Businesses are driven by the incentive for profit, so it is natural for them to want to reduce the success of competitors who cut into these profits. If a business becomes a monopoly (the only producer of a particular good or service that people need), however, its power over consumers is unlimited: it can raise prices as much as it wants, and it can make goods of as poor or as high quality as it wants.

In other cases of unfair domination, two or more prominent business firms in one industry might enter into agreements with one another that similarly harm the public interest. One form of such an agreement is a merger, the legal joining of different business firms. Not all mergers result in harm to the public interest, but if the merging businesses are sufficiently large, they can function similarly to a monopoly. Another way that two or more business firms might trample on the rights of competitors and consumers is by price-fixing (illegal agreements to keep prices at levels that will ensure profitability). Price-fixing is never in the best interest of anyone but the businesses involved in the agreement.

Both the U.S. government and state governments in the United States have laws in place, commonly known as antitrust legislation, to guard against these sorts of abuses. National antitrust legislation first came into being in the late 1800s. The law passed at that time has been supplemented by other laws and updates over the intervening decades as businesses, in their desire for profits, have found new ways of eliminating competition.

When Did It Begin

The late nineteenth century was a time of great transformation for the U.S. economy. Such businessmen as John D. Rockefeller (1839–1937; a founder of Standard Oil Company) and Andrew Carnegie (1835–1919; a founder of U.S. Steel Corporation) presided over an era of enormous industrial growth and dominated their respective industries, conducting business on an unprecedented scale and amassing previously unimaginable fortunes. These men were perceived, however, as using force and manipulation to dominate their industries unfairly, and their critics accused them of being robber barons who would stoop to any unethical act for the sake of profit. Rockefeller intimidated competing oil companies until they went out of business. He then bought up the remaining oil companies, which were thereafter ruled by a single organization (called a trust). Standard Oil was one of the most notorious trusts of its day. Public opposition to such behavior sparked the Sherman Antitrust Act of 1890. The Sherman Act outlawed any “contract, combination … or conspiracy in restraint of trade or commerce” and made it illegal to build or try to build a monopoly in any industry.

The U.S. government used the Sherman Act to break up numerous trusts in the following decades, but the lack of specificity in the new law meant that businesses could find other ways to reduce competition. Congress therefore passed the 1914 Clayton Antitrust Act, which specifically outlined a number of anticompetitive practices that would now be illegal. Mergers that reduced competition were among the newly outlawed business practices. Other provisions of the Clayton Act concerned manufacturers and dealers of certain goods who conspire together to squeeze out other manufacturers and dealers of those same goods. The Federal Trade Commission Act, also passed in 1914, established the Federal Trade Commission (FCC), the government organization that has been chiefly responsible for monitoring anticompetitive behavior among businesses since that time. The rules against mergers were tightened further in 1950 when Congress passed the Celler-Kefauver Act.

More Detailed Information

A capitalist economy (one in which firms are owned by private individuals rather than the government) functions best when a high level of competition exists. When there are many producers of, say, automobile tires, and they are all competing for the money of a large number of consumers, tires get produced more efficiently, and prices are driven as low as they can go without making the tire business unprofitable. Those tire makers that master their business under these conditions will prosper while giving consumers what they need and want at a reasonable price.

Suppose, however, that one tire maker, Super Tires, were to win out over all the others by delivering a superior product at a reasonable cost. As Super Tires grew, its owners would naturally want to find ways of ensuring that it continued to grow as quickly as possible for as long as possible. One way of pursuing this goal might be to buy up the competition, purchasing all the tire-producing businesses that threaten its dominance. Free from competition, Super Tires would then have a monopoly over the tire industry. At this point it could charge virtually any price it wanted, and it could provide tires of whatever quality it wanted, because consumers would have no other place to buy their tires, and they would not be able to operate their vehicles without tires. To further reduce the possibility of competition, Super Tires would be able to cut prices long enough to make it impossible for smaller firms to compete, forcing them to lose money and eventually close. Once such competitors had left the industry, Super Tires could simply raise prices again to make up for any losses it incurred while pushing its smaller competitors out of business.

Suppose, alternately, that Super Tires and a competitor, Maximum Tires, were equals at the top of the tire industry. Suppose both of them had an equal interest in staying at the top of the industry, but neither had enough of an advantage over the other to push it out of business or to purchase it outright. The two companies might agree, in these circumstances, to merge into one company with twice the potential for profits (or more). Alternately, if they controlled enough of the tire industry together that no smaller firms could threaten them, they might agree to fix their prices at a level that would unfairly benefit both of them. These actions, called mergers and price-fixing, respectively, have the potential to reduce the choices and power of consumers as much as a monopoly does.

In the real world anticompetitive actions can be more complicated than this, and they can be harder for the public and the government to fight. It can also be difficult to tell when a company’s dominance has reached a level that does, in fact, harm the public interest. Opponents of antitrust legislation often argue that large-scale businesses are necessary to produce goods at the low prices that consumers are accustomed to paying and that enormous resources are necessary to finance technological breakthroughs and other difficult tasks in the modern business world.

Recent Trends

Antitrust laws have always been controversial, perhaps never more so than in the early years of the twenty-first century. The business climate of this time was characterized by two trends that, in the context of antitrust legislation, seemed to be at odds with one another. On the one hand there was an increasingly global economy in which businesses were forced to compete with their counterparts all over the world rather than just with their domestic counterparts. This would seem, by the logic of capitalism, to be in the best interest of consumers and the public. On the other hand multinational corporations (business firms that operate in many countries) dominated world business more than ever before. These giant business firms were often large enough to eclipse smaller competitors not just in their countries of origin but in any country in which they chose to do business. If the trend of corporate dominance over global business were to continue, it could (theoretically and according to some) have the effect of reducing the power of consumers worldwide.

In this business climate there was no consensus about antitrust legislation. Some people felt that multinational corporations needed reining in, while others felt that increased antitrust efforts would do nothing but reduce economic efficiency. Whether or not the global economy would be best served by an increase or a decrease in antitrust efforts remained an open question among economists and policymakers.