ANTITRUST LAWS aim to ensure the existence of competitive markets by sanctioning producers and sup-pliers of products and services when their conduct departs from that competitive ideal. Of course, what constitutes this ideal and what conduct betrays it have varied during the long history of antitrust law. Until the late nineteenth century, this regulatory enterprise belonged chiefly to the courts. Then, with the rise of large-scale industrial corporations, Congress entered the fray. Beginning in 1890, Congress has enacted three key antitrust statutes—the Sherman Act, the Clayton Act, and the Robinson-Patman Act—each responding to a moment of heightened public anxiety about monopolistic combinations and their anti-competitive business practices.
Long before the Sherman Act, Americans harbored a deep hostility toward monopolies. Several of the first state constitutions, written in the 1770s and 1780s, condemned monopolies as violations of the cherished principles of equal rights and equality before the law. Some of the founding generation, including Thomas Jefferson, sought to include a prohibition on monopolies in the federal Bill of Rights. Andrew Jackson helped make the second National Bank one of the most controversial "monopolies" of Antebellum America.
For a Jefferson or Jackson, "monopoly" meant state-granted authority over some economic activity, like a particular domain of banking or a trade or a means of transportation, in the hands of some politically privileged group at the expense of the majority. To possess a monopoly in this sense was to enjoy a legal right to exclude others from pursuing the same activity.
Gradually, this emphasis on state-created monopolies gave way to an emphasis on economic power in a given market and on the abuse of that power. At common law, to "monopolize" came to mean preventing others from entering or competing in a market or line of business by agreement or combination among erstwhile competitors. An agreement or combination to restrict competition by itself was not enough; unless it aimed to close the channels of trade to others, or unless it resulted in outrageous prices or the withholding of necessaries of life, it did not fall under this common law prohibition.
By the late nineteenth century, general incorporation laws, enacted in Jackson's day to make the privilege of incorporation available to all, had helped make the corporation a common form of industrial enterprise. At the same time, booming technological development and industrial growth brought new wealth, new inequalities, and new concentrations of economic power.
The "rise of big business" began with the railroads in the 1850s; only in the 1880s and 1890s, however, did manufacturing firms follow suit. By 1900, John D. Rockefeller's Standard Oil Company, James B. Duke's American Tobacco Company, and dozens of other new nation-spanning giants had emerged, exerting substantial control over entire industries and their newly nationalized markets. In popular political discourse, firms like these were dubbed "trusts"; in fact, most did not take the legal form of a trust, but all shared centralized management and great size.
The search for profits and control motivated this great movement of expansion and consolidation. In many industries, new technologies and new ways of organizing production yielded economies of scale, which advantaged large firms. Bigness, however, magnified the costs of sharp increases in the cost of materials, market downturns, or "ruinous competition" brought on by new market entrants and the "overproduction" of goods. Some firms sought to manage these hazards through vertical integration; others through horizontal arrangements. The latter involved producers of a given good agreeing to limit production and/or maintain prices; it could take the simple form of a contract or the more complex and "tighter" form of a cartel or, finally, a merger among previously competing firms. Vertical integration, by contrast, involved the gathering of many functions into a single firm: from the extraction of raw materials, for example, to the transformation of those materials into finished products, to the wholesaling and retailing of those products. The leading example of this kind of corporation was Standard Oil, whose ruthless and predatory practices generated a public outcry against the "Trusts." So, too, did the horizontal mergers that resulted in "Trusts" like the gigantic American Sugar Refining and American Tobacco Companies. While the "Trusts" often brought down, or left unaffected, the costs of goods to consumers, their vast power over the nation's economy—as well as their exploitive labor practices and their penchant for buying and selling state and federal lawmakers—were ominous. The Trusts also seemed bent on destroying the nation's small-and medium-sized businesses and producers.
Before the passage of the Sherman Act in 1890, the states had responded to the Trusts with their own anti-trust efforts, inscribing antimonopoly provisions in their state constitutions and enacting antitrust legislation of their own. State antitrust measures took various forms—many protecting against some combination of monopoly, restraint of trade, restraint of competition, pooling, price fixing, output limitations, territorial divisions, resale restraints, exclusive dealing, refusals to deal, local price discrimination, and predatory pricing—and often set forth more detailed prohibitions and provided for stricter sanctions than did federal legislation (including fines and prison terms). What is more, the states and not the federal government issued corporate charters. Accordingly, the power to regulate and limit corporate growth directly, through structural constraints, was a power widely viewed as belonging to the states; and where the states undertook to enforce such limits, the United States Supreme Court upheld them.
During the 1880s, a few state attorneys general undertook formidable suits under this body of law. In general, however, state prosecutors and state judges proved reluctant to invoke these restraints, out of fear that strict enforcement would result in factory closures and ultimately damage local economies. The giant corporations and the corporate bar also succeeded in lobbying through the New Jersey, Delaware, and New York state legislatures major revisions of those states' corporation laws, eliminating or weakening key restraints on corporate growth and consolidation. Corporations hobbled by other states' more traditional legal regimes easily reincorporated in the liberalized jurisdictions.
Despite these sharp practical limitations of state anti-trust law, members of Congress and the federal bench would continue, during the formative era of federal anti-trust, to view state government as a primary locus of authority over the Trusts. So, when Congress took up the matter in 1888–90, the division of federal versus state authority loomed large in debates. Senator John Sherman of Ohio, chair of the Senate Finance Committee and sponsor of the Sherman Act, saw clearly the inadequacies of state regulation. His first antitrust bill envisioned direct federal control over corporate structure, authorizing federal courts to dissolve all agreements or combinations "extending to two or more states," and "made with a view or which tend to prevent full and free competition" in goods "of growth, production, or manufacture," much as state officials could "apply for forfeiture of charters." Sherman's bill, however, ran afoul of the constitutional scruples of colleagues on the Judiciary Committee, who saw it as usurping power belonging to the states, not the national government. The latter redrafted Sherman's bill in terser terms, so the statute as enacted omitted reference to "growth, production, or manufacture" and simply condemned every combination in restraint of trade or commerce and also made monopolization and attempts to monopolize any part of interstate trade or commerce.
The 1890 Congress deliberately left to the courts the task of determining which specific forms of business conduct and business arrangements violated the general common-law-inspired language of the Act. As a procedural matter, the Act departed from the common law in two key respects. It made such restraints or monopolies not merely void (as they were at common law) but punishable as misdemeanors and also liable to private, civil suits for treble damages. As a substantive matter, however, for two decades, judges and commentators could not agree on whether the new statute simply codified the common law norms or enacted stricter prohibitions. The common law distinguished between "reasonable" and "unreasonable" restraints, condemning only the latter, but the statutory language contained no such language. As is often the case, it seems likely that Congress preferred ambiguous statutory language that could please many competing constituencies: in this case, both the agrarian and populist public demanding a restoration of proprietary forms of capitalism and the dismantling of the great trusts, and also the metropolitan business interests that favored the continued development and flourishing of the new large-scale corporations. To the latter constituency, Sherman offered assurances that the courts would carry forward the old common law distinction and leave alone the "useful" combinations, no matter how large. Likewise, the members of the Judiciary Committee, who drafted the language of the actual statute, affirmed that it did no more than authorize the federal courts to extend the "old doctrine of the common law" to interstate (and foreign) commerce.
The Supreme Court pursued a somewhat jarring course. Until 1911, a majority of the Court insisted that the Act went further than the common law, condemning all restraints of trade. Thus, the Court read the Act to outlaw cartel-like arrangements on the part of trade associations of railways or manufacturing firms, which, from participants' perspective, merely aimed to halt "ruinous competition" by establishing uniform rates or prices. By contrast, where such arrangements did not aim to foreclose competition from outsiders nor result in "unreasonable" costs to the public, but instead appeared to be "for the purpose of preventing strife and financial ruin," common law courts frequently had upheld them. Similarly, in respect of tighter consolidations, common law doctrine generally held that a corporation's buying out of former competitors was not, as such, an unlawful restraint or monopoly; unlawfulness demanded other showings, such as an effort to prevent the former owners from reentering, or to prevent outsiders from entering or remaining in the line of business.
The Supreme Court majority, however, interpreted the statute in light of the widely shared social and political vision of a market order composed of small producers and independent proprietors. On this account, "powerful combinations of capital" threatened the well-being of the republic because they tended to "drive out" the "small business man" and the "independent dealer," and this was wrong, irrespective of whether such "powerful combinations" lowered or raised the price of consumer goods. This outlook met ridicule from dissenters like Justices Oliver Wendell Holmes and Edward D. White, political leaders like Theodore Roosevelt, and the corporate bar. In 1911, in the Standard Oil and American Tobacco cases, the Court, under now Chief Justice White, changed course and held that the common law's "rule of reason" was implicit in the Act. This tension between a vision of Anti-trust that condemns the "curse of Bigness" and concentrated corporate power on broad social and political grounds, versus one that has no gripe with bigness and focuses more narrowly on some conception of consumer welfare and on the prevention of particularly abusive and predatory competitive tactics, would continue to run through the changing course of legal development for the next century.
During the same two decades, while Court doctrine seemed to affirm smallness, bigness proceeded apace. Most of the nation's two hundred largest corporations were formed during the decade bracketing the turn of the century. The great majority of these new corporations, the "big business" of the early twentieth century, controlled forty percent or more of the market shares of their products; and together, they held more than one-seventh of the nation's manufacturing capacity. Many observers insisted that antitrust doctrine actually encouraged this merger movement, because its strictures seemed to fall far more heavily on cartels and loose price-fixing agreements than on mergers. In any case, public confidence in the nation's antitrust laws had all but vanished by the 1912 presidential election, and candidates Theodore Roosevelt and Woodrow Wilson both promised to bring greater public authority to bear upon the giant new corporations. Roosevelt's solution lay in supplanting state corporate charters with federal ones. Bigness, Roosevelt candidly declared, was here to stay. He proposed creating a new body of federal corporation law to separate the "good Trusts" (with their greater efficiency and economies of scale) from the "bad" (with their predatory business practices and their purely opportunistic and anti-competitive welding together of firms). For his part, candidate Wilson echoed his advisor Louis Brandeis in decrying the "curse of Bigness"; bigness in this view was generally a bad thing in itself. The Brandeisian reform vision evoked the hope of restoring a more decentralized political economy in which smaller firms continued to flourish. So, for example, Brandeis thought trade associations among small businesses deserved substantial freedom from antitrust regulation, while industrial giants ought to be policed more harshly.
Two years later, President Wilson signed into law two new antitrust measures, the Federal Trade Commission (FTC) and the Clayton Acts of 1914. The FTC Act gave birth to a regulatory commission—the Federal Trade Commission—with the power to identify and proscribe a wide range of "unfair methods of competition" and "deceptive business practices." The Wheeler-Lea Amendments of 1938 broadened the FTC Act, adding "unfair or deceptive acts or practices in commerce" to the prohibition against "unfair methods of competition," in the hope of increasing the efficiency of the FTC by reducing the time and expense involved in proving that a violator's activities had a negative effect on competition. The Clayton Act, on the other hand, responded to the call for more explicit and detailed antitrust legislation. In contrast to the highly general language of the Sherman Act, the provisions of the Clayton Act outlawed specific business practices, such as price discrimination, tying and exclusive dealing contracts, and corporate stock acquisitions.
Congress amended the Clayton Act twice, once in 1936 by the Robinson-Patman Act, and again in 1950 by the Celler-Kefauver Antimerger Act. The Robinson-Patman Act revised the prohibition against price discrimination in Section 2 of the original Clayton Act; it is the only federal law that specifically bans discriminatory pricing practices. Enacted in response to new forms of anti-competitive price discrimination, the law had a Brandeisian inspiration. It aimed to prevent chain stores from exploiting their bulk purchasing power to gain discriminatory price concessions from suppliers that unfairly threatened the competitiveness of independent retailers. In its effort to maintain a fair and competitive balance between small merchants and large chain stores, the Robinson-Patman Act was an attempt to reestablish equality of opportunity in business.
The Celler-Kefauver Act proscribed certain types of corporate mergers achieved through asset or stock acquisition, disallowing mergers that significantly lessened overall competition in a market (as opposed to the original Clayton Act, which dealt only with the effects of mergers on competition between the two merging companies). It aimed to inhibit apparently unhealthy concentration by trying to maintain a substantial number of smaller, independent competitors. From 1950 to 1980, Republican and Democratic administrations, as well as the federal courts, vigorously enforced the antimerger laws. The courts also redefined "monopolization" under the Sherman Act, so that statutes outlawed all exclusionary, restrictive, or anticompetitive conduct. The executive branch and the courts also assailed any cartel-like activity, including restraints that limited the access of horizontal competitors to outlets or inputs. The world of antitrust regulation changed dramatically during the 1980s with the advent of the Reagan administration. Economic stagnation created a climate in which businesses pressed the government for aid, and the Reagan administration ushered in a new era of laissez-faire, loosening federal regulation in many arenas including antitrust.
The hands-off antitrust policies of the Reagan and Bush years opened space for a major increase in corporate mergers. The anti-anti-merger policy, together with the more general diminution in antitrust enforcement, found intellectual support in the Chicago School's neo-classical liberalism. The latter held that unfettered freedom of business consolidation and competition almost always enhanced overall efficiency in the economy; and that such efficiency, in turn, conduced to "consumer welfare." The Chicago School's antitrust theorists, and with them Republican executives and judges, spurned as sentimental and economically senseless the social and political considerations that animated earlier generations of antitrust policymakers.
The Clinton administration, 1993–2001, ushered in a reformed "consumer welfare" standard. Instead of protecting the freedom of firms to maximize efficiency by their own lights, new policies tried preserving competition for the benefit of consumers. At the same time, while the focus of past antitrust activism was on price competition and preventing business activities that could result in artificially high prices, the Clinton administration's focus was on encouraging innovation and preventing business activities or combinations that could stifle innovation.
As business became increasingly globalized, the need for international enforcement of antitrust laws became apparent. Attempts at establishing transnational antitrust laws at the end of the twentieth century came up short. During the Clinton years, the United States championed a system of international cooperation in the enforcement of national antitrust laws as an alternative to a more thoroughgoing international solution.
Peritz, Rudolph J. R. Competition Policy in America: History, Rhetoric, Law, 1888–1992. New York: Oxford University Press, 2000.
Sklar, Martin. The Corporate Reconstruction of American Capitalism, 1890–1916. New York: Cambridge University Press, 1988.