Federal Trade Commission

What It Means

The Federal Trade Commission (or FTC) is an independent agency of the U.S. government. Its purpose is to guard against business practices that interfere with competition in the marketplace and to protect American consumers from various kinds of fraud and deception. A free-market economy, such as the American economy, is founded on the idea that if companies are forced to compete with one another for consumer dollars, they will have to offer goods and services of the highest possible quality for the lowest possible prices, both of which are good for the consumer. Competition between companies also benefits the consumer by making a wide variety of choices available in the market.

Anticompetitive business practices are those in which a company or companies gain an unfair advantage in the market, making it difficult or impossible for other companies to compete with them. As a result, the dominant company may be able to profit without providing the best product or the best prices, because the consumer can no longer choose a better option. Some examples of business practices that can be anticompetitive include: price fixing, in which two or more companies conspire to set prices as they please, so that market forces no longer work; tie-in sales, in which two products are sold in a bundle, so that the consumer cannot buy one without the other; exclusive dealership agreements, in which a retailer or wholesaler is required to buy from a certain supplier or manufacturer; interlocking corporate directorships, in which one individual serves as director of two or more companies that are supposed to compete with each other; and mergers or acquisitions, in which two or more companies join together (or consolidate), becoming substantially more powerful than any of their competitors. When one company gains exclusive control over the market for a particular product or service (meaning that it has eliminated its competitors), it is called a monopoly.

Consumer fraud or deception can be any form of cheating in which a company falsely represents itself or its product, enticing consumers to pay for something they do not receive. In cases of false advertising, for example, a consumer may pay for an expensive product that promises a “miracle cure” for baldness—only to find that his hair continues to fall out. Other common forms of fraud include telemarketing (making sales over the telephone) scams, such as when a consumer agrees to divulge personal financial information (like a credit card number) over the phone in exchange for a fantastic prize that does not actually exist. In addition to cheating consumers out of their money, such frauds may also make consumers less confident about buying things, even from lawful businesses, in the future. If consumers lose faith in the market and stop spending their money, the whole economy suffers.

The FTC’s job is to enforce laws prohibiting consumer fraud and business practices that severely limit competition, to investigate cases where these laws may have been violated, and, when appropriate, to bring these cases to federal court. The FTC also seeks to prevent fraud and anticompetitive practices by educating consumers and businesses about what these issues mean and how to identify and avoid them.

When Did It Begin

In the 1880s and 1890s the American marketplace saw a wave of corporate mergers in which it was common for five or more companies to consolidate to form a business “trust.” Known today as a cartel, this kind of trust is a business that seeks to create a monopoly in the market. The widespread rise of these trusts in such industries as railroads, oil, coal, steel, sugar, tobacco, and meatpacking touched off a period of intense national debate over the issue of fair competition in business. On one hand consolidated businesses could run more efficiently and thus compete more effectively in the international marketplace. On the other hand these giant companies ruled the domestic market; smaller companies could no longer compete, and consumers were at the mercy of the big companies’ prices. Free and fair competition, and the right of average citizens to build their own small businesses, were seen as core American values that needed to be protected.

Passed in 1890, the Sherman Antitrust Act formed the foundation of antitrust legislation, enabling Presidents Theodore Roosevelt (1858–1919) and William Howard Taft (1857–1930), successively, to sue and enforce the breakup of dozens of trusts. Perhaps the most notorious of these trusts was Standard Oil Company, owned by John D. Rockefeller (1839–1937). In 1911 the Supreme Court ruled that Standard Oil must be broken up into 36 smaller companies that would compete with one another.

But the Sherman Act failed to define anticompetitive practices in specific terms, and without an independent agency to investigate possible antitrust cases, the law was difficult to enforce. Upon winning the election of 1912, Woodrow Wilson (1856–1924) made antitrust reform central to his New Freedom Program. In 1914 Congress passed both the Federal Trade Commission Act, which established the FTC, and the Clayton Antitrust Act, which outlawed specific business practices that substantially lessened competition, such as those described above.

The FTC Act has been amended numerous times since its passage. Two key amendments were the Wheeler-Lea Amendment of 1938, which prohibited false advertising of foods, drugs, cosmetics, and therapeutic devices; and the Magnuson-Moss Warranty Act of 1975, which protects consumers against misleading warranty practices (a warranty is a guarantee offered by the seller or manufacturer of a product, promising repair if the product breaks within a certain time after purchase).

More Detailed Information

The Federal Trade Commission is run by a bipartisan (including both Republicans and Democrats) body of five commissioners, each of whom is nominated by the president and confirmed by the Senate for a seven-year term. One of these commissioners is chosen by the president to act as chairman. The bulk of the FTC’s work is carried out by three bureaus: the Bureau of Consumer Protection, the Bureau of Competition, and the Bureau of Economics.

The Bureau of Consumer Protection (BCP) is dedicated to protecting consumers against unfair or deceptive business practices, including false advertising, telemarketing fraud, insurance scams, and privacy violations. Consumers may file complaints directly with the BCP if they feel they have been victimized by these or other unfair practices. In 2004 an FTC survey found that the most frequently reported types of consumer fraud were advance-fee loan scams, in which consumers paid up-front fees for “guaranteed” loans or credit cards that they never received; instances in which consumers were billed for buyers’ club memberships or publication subscriptions they did not order; and scams involving fake offers of credit card insurance (a safety net in case you are unable to make your credit card payments because of job loss or other life events). The BCP investigates such complaints and may bring actions to federal court. In some consumer protection matters the FTC may work in conjunction with the U.S. Department of Justice. In addition to general enforcement of laws and regulations, the BCP also promotes consumer and business education.

The Bureau of Competition (BOC) is the antitrust division of the FTC. Its mission is to protect healthy competition in the marketplace so that consumers have access to a broad array of products and services at the lowest possible prices. To accomplish this the BOC investigates possible violations of antitrust law and, when necessary, takes rule breakers federal court. The BOC shares responsibility for enforcing antitrust laws with the Antitrust Division of the Department of Justice (DOJ). One of the most well-known antitrust cases of the late twentieth century involved allegations against software giant Microsoft of anticompetitive practices. The central question of the case, which began as an FTC investigation in 1991 and was eventually taken to trial by the DOJ in 1998, was whether Microsoft’s monopoly in the PC operating system market was the result of illegally blocking competition or of simply earning market dominance through superior innovation and competition. Although the DOJ and Microsoft reached a proposed settlement in 2001, controversy continued over Microsoft’s practices. In addition to its enforcement capacity, the bureau also conducts research and develops policy on competition issues.

The Bureau of Economics is in charge of evaluating how the FTC’s actions and other government regulations affect the economy. It also studies various market processes (such as changes in prices or employment levels) as they relate to competition and consumer protection. This bureau’s analyses may influence the FTC’s decisions in consumer protection and antitrust cases; it may also affect proposed legislation by Congress. For example, when gas prices soared in 2006, Congress asked the Bureau of Economics to comment on proposed legislation against price gouging (the practice of setting unfairly high prices during a supply shortage). After conducting extensive investigations the Bureau recommended against the legislation. As with the FTC’s other main bureaus the Bureau of Economics’ ultimate goal is to ensure healthy competition and ample consumer choice in the American marketplace.

Recent Trends

One of the most successful FTC measures in recent decades is the Do-Not-Call Registry, a free national service designed to help consumers limit the number of unwanted phone calls they receive from telemarketers. The registry is the result of the Do-Not-Call Implementation Act of 2003 (based on the 1994 Telemarketing and Consumer Fraud and Abuse Prevention Act), which is jointly enforced by the FTC and the FCC (the Federal Communications Commission, which regulates interstate and international communications by radio, television, wire, satellite, and cable). Once a consumer has submitted his or her phone number to the Do-Not-Call Registry, most telemarketers are required to delete that number from their call lists.

With the rapid rise of internet commerce in the late twentieth and early twenty-first centuries, the FTC faces a vast new realm of consumer protection issues. Not only have scam artists found countless ways to swindle consumers over the Internet, but also consumers have become increasingly vulnerable to privacy violations and identity theft. The FTC has begun to investigate many of these issues and is making a major effort to educate consumers about the dangers of the Internet by publishing information about invasive spyware programs, spam, identity theft, kids’ privacy, online auctions and shopping, electronic banking, and other topics. The FTC is also involved in various efforts to protect and promote fair competition in e-commerce (business conducted over the Internet). As Internet applications continue to multiply and change, the challenge of regulating the virtual world remains significant.