Modern antitrust legislation may be said to have originated in the United States, with the Sherman Act of 1890, although government efforts to regulate the market are as old as government itself. Viewed in this larger perspective, antitrust legislation can be seen to consist of two distinct parts. The first part is a set of rules governing the behavior of firms in the market place. Any economy —capitalist, socialist, or mixed—must devise such rules to the extent that it makes use of a market. There must, for example, be a law of torts and a law of contracts. Insofar as American antitrust legislation deals with cartels and trade practices, it merely amends these two bodies of law in the interest of strengthening competition in the market place. It is this part of American antitrust legislation that has received most of the sympathetic attention of foreign observers. The British Restrictive Trade Practices Act of 1956, the German Law Against Restraint of Competition of 1957, and the cartel clause of the European Common Market Agreement probably owe something to American success in cartel suppression.
In the United States, however, antitrust legislation has done more than amend the rules of the game for businessmen. It has been employed deliberately and effectively, although often erratically, to discourage the degree of industrial concentration that a policy of laissez-faire would produce. In other countries, the complexities of legal codes sometimes contribute to this result but generally not as a matter of national policy. The American legal commitment to “trust busting,” or perhaps more accurately to “trust prevention,” is, as yet, unique in capitalist countries.
Authorities who support this commitment commonly base their case on one or both of two arguments. First, a policy of laissez-faire, which lets mergers go unsupervised, leads to economic waste; for the profits to be had from monopoly bring into being firms that are too large for technically efficient production. Second, economic decentralization is a good thing even though it requires the sacrifice of some economies of scale; specifically, economic decentralization helps to preserve small business activity as a way of life and contributes to the dispersion of the political power of corporate owners and managers.
Neither of these arguments has been received with much sympathy outside the United States. The assertion that a policy of laissez-faire will produce firms that are inefficiently large is unconvincing in countries whose major firms are exposed to vigorous foreign competition and, at any rate, are quite small by American standards. Foreign observers who fear the pernicious political influence of private economic concentration in their own lands are likely to favor the simple, direct remedy of public ownership over the cumbersome, indirect remedy of trust busting. Foreign observers who do not fear concentration see in antitrust policy only what Adam Smith saw in the laws against engrossing, forestalling, and regrating—a silly and perverse interference with freedom of contract.
The Sherman Act. Section 1 (as amended) of the Sherman Act provides:
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations … is declared illegal…. Every person who shall make any contract or engage in any combination or conspiracy … shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding fifty thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.
Section 2 provides:
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor, and, on conviction thereof [etc.].
Given the vagueness of the above provisions, generations of judges, lawyers, and economists have puzzled over what the Sherman Act was really meant to accomplish. One cynical school maintains that the Congress of 1890 was merely passing a general resolution against sin; that it did not intend that litigation should ever arise under the Sherman Act. According to this school, the Republican majority, while seeking to increase import duties in 1890, became embarrassed by the charge that the tariff was “the mother of trusts” and sought to reassure the electorate by supporting an eloquent, if ambiguous, antitrust measure. Another school of thought holds that the Congress in 1890, rightly or wrongly, was seeking to stem the trend toward industrial concentration. No doubt the truth lies somewhere between these extreme interpretations of Congressional motives. Many legislators feared and resented the near monopoly positions gained by a few of the trusts, notably the Standard Oil Company, but nothing in the debates on the Sherman Act suggests that Congress anticipated its vigorous enforcement.
The historical importance of the Sherman Act lies not in what it directed but rather in what it permitted. In effect, it represented a grant of discretionary power to the attorney general and the federal courts to deal with the emerging corporation in the American economy. Since 1890 the substance, as distinct from the form, of antitrust legislation has been supplied almost entirely by administrative initiative and court decisions. Statutory revisions of the Sherman Act have been few, infrequent, and unimportant.
A violation of the Sherman Act of 1890 may be treated as a misdemeanor and punished by fines and imprisonment, although, in fact, prison sentences are hardly ever imposed. These criminal cases are brought to the courts by the attorney general. A violation may also be treated as a civil wrong and redress sought by the attorney general through proceedings in equity. The relevant provision of the Sherman Act says only that the government may “enjoin” unlawful acts. The courts, however, have construed this provision as their authority to employ the wide range of equitable remedies that are usually lumped together as trust busting, notably dissolution of established corporations, injunctions against mergers, compulsory sale of corporate property, and decrees that restrict the types of business that a corporation may pursue. The Sherman Act also provides for enforcement through civil suits brought by private parties. The private party injured by an antitrust violation of another party may sue and if successful collect treble damages. Since 1914 he has also been able to seek an injunction that would protect him against another’s unlawful course of action that might, in the future, cause him damage.
The formative period. In the formative years of antitrust enforcement, 1891–1920, three problems especially engaged the attention of the attorney general and the courts—federal policy toward cartels, the distinction between fair and unfair trade practices, and industrial concentration. Of these problems, only the first was handled with decision and dispatch. Following passage of the Sherman Act, the attorney general moved immediately against cartels; and in the Addyston Pipe case (175 U.S. 211, 1899) the Supreme Court ruled that any combination of rival merchants formed for the express purpose of raising the price of their wares is illegal conspiracy within the meaning of the Sherman Act. (The case involved a cartel of six manufacturers of cast-iron pipe, which had undertaken to rig the bids on municipal government contracts.) In so ruling, the Court implicitly rejected the common-law rule that a cartel agreement is enforceable provided that the restraints on competition imposed are reasonable, e.g., designed to hold prices at a “fair” level. With unimportant exceptions, the judicial objection to cartels was consistently reiterated and elaborated until in the Socony-Vacuum case (310 U.S. 150, 1940) the Supreme Court held that all efforts to restrict competition by collective action—even agreements to lower price—are illegal per se; and that it is not the business of judges to inquire into the raison d’être of the restraints or to balance their possible social benefits against their possible social costs.
In the areas of doubtful trade practices and industrial concentration, the evolution of federal policy was neither rapid nor consistent. This is not surprising in view of the novelty and complexity of the problems encountered in these areas. In the E. C. Knight case (156 U.S. 1, 1895) the attorney general halfheartedly sought to enjoin the sugar trust from acquiring four more firms but desisted when rebuffed in the Supreme Court on a technicality. A direct challenge to the presumed objects of the Sherman Act was declined by the government when three of the firms enjoined from combining to fix prices in the Addyston Pipe case were allowed to circumvent the decision by merging. Indeed, the government took no action at all to discourage the unprecedented wave of mergers that swept the United States in the 18 months after the condemnation of the cast-iron pipe cartel by the Circuit Court of Appeals in February 1898. Nor did federal officials for several years manifest any enthusiasm for doing legal battle with the Standard Oil Company, the trust that, at least in popular folklore, had employed every contemptible commercial practice to eliminate competition—the use of bogus independents, railroad rebates, “fighting brands,” local price cutting, unwarranted lawsuits, commercial bribery, political corruption, etc.
By 1906, however, the stage had been set for the emergence of an antitrust policy that amounted to more than a harassment of cartels. A decade of serious economic inquiry, together with a generation of Populist agitation, by then had combined to destroy the faith of most lawyers, economists, and laymen in laissez-faire. Since Adam Smith’s time, the case for laissez-faire—or to use the term more favored by lawyers, “freedom of contract”— had rested upon the assumption that the monopolist who succeeds in earning high profits will, in the not-so-long run, fall victim to his own success. His profits will attract new producers into his field, output will rise, and price will fall. The validity of this assumption was called into question by the spectacular success of the Standard Oil Company, which by 1906 had been holding a vastly profitable near-monopoly position in petroleum refining against all comers for thirty years. Faith in laissezfaire was further undermined by the first great merger movement in American economy (1899–1901), which in scores of industries replaced family firms with the modern corporation. In other times and places, the decline of faith in laissez-faire as a safeguard against monopoly might have produced resignation or a widespread demand for public ownership of the “basic” industries. That it did not produce this reaction in the United States of the early 1900s was, in large measure, due to the emphasis placed upon the role of “predatory” competition in discussions of the trust problem. According to this emphasis, the large firm that can manipulate markets and men has a marked “unfair” advantage over its smaller rivals; hence, the fact that a particular trust could survive and grow in the competitive struggle was not to be taken as evidence of its superior efficiency. From this reading of industrial experience, it follows that the sensible solution is an antitrust policy that curbs corporate size and enforces fair rules of the game in the business world.
The advent of antitrust policy in the United States thus marks a radical transformation in the ideology of capitalism. In the thought of nineteenth-century liberals, competition was viewed as essentially a natural process, something that would inevitably come to pass if only individuals were free to “truck, barter, and exchange one for another” without the hindrance of officious civil servants. In the philosophy of antitrust, competition is viewed as an artificial and fragile creation of legislation. (That the nineteenth-century view that made competition a natural process was probably closer to the truth is another matter; the supporter of antitrust devotes far more attention to the failures of competition than to its successes.)
The serious effort to alter the structure of the U.S. economy by antitrust action began in 1905 with the second administration of Theodore Roosevelt. The legal foundation for this ambitious undertaking had been laid in 1904 when, in the Northern Securities case (193 U.S. 197, 1904), the Supreme Court had compelled a holding company to dispose of the securities of two railroads. No genuine economic issues were presented by this case since the financial group, headed by J. P. Morgan, that controlled the holding company also controlled the two railroads. The decision did, however, establish the legality of the trust-busting power for use in later cases.
The government’s first major effort at trust busting in the series of important cases brought between 1906 and 1920 was not wholly successful. Nevertheless, in 1911 the Supreme Court held that the Standard Oil Company of New Jersey was an illegal combination in violation of the Sherman Act and ordered it broken up. Ultimately the trust was rearranged into over thirty smaller units. Unfortunately, while the Court did not doubt that Standard Oil should be dissolved, it could not—or would not—offer a clear explanation of its action. The Standard Oil Company could have been deemed a fit subject for trust busting in 1911 because it controlled over 85 per cent of the country’s petroleum refining capacity and/or because it had achieved this market share by “unfair” means. The Court was content to condemn the Rockefeller empire as an unreasonable restraint of trade without going into details.
The oligopoly problem. The successes of antitrust action between 1906 and 1920 were few but spectacular. Indeed, as examples of literal trust busting they were never to be equaled again. With a staff of only a handful of lawyers and secretaries, the Antitrust Division of the Justice Department was nevertheless able to force a notable rearrangement of corporate structure in the tobacco, explosives, farm machinery, meat-packing, transportation, and petroleum industries. These successes, however, were of the sort that could not be repeated indefinitely since they were at the expense of firms that, like the Standard Oil Company, were nearly all-powerful in their respective industries and owed their dominant market positions to mergers or objectionable trade practices. Firms that satisfied these requirements were but a tiny fraction of the business population. After the few obvious candidates for trust busting had been disposed of, it became clear that the real problem in antitrust legislation was provided not by the “bad” monopolist but rather by the “good” oligopolist, that is, the firm that has obvious market power without market domination and is content to coexist with its rivals. The good oligopolist makes his first appearance in the Supreme Court in United States v. United States Steel Corp. (251 U.S. 417, 1920).
The defendant corporation had been formed in 1901 when J. P. Morgan succeeded in amalgamating a large number of steel firms, many of which were themselves the products of recent mergers. He thereby secured control of at least 60 per cent of the country’s steel-making capacity. The avowed object of the combination was more efficient steel production; but one may assume, as did the attorney general, that Morgan also perceived the monopoly profit that could be had by conducting a major portion of the steel industry as a unified operation. The presence or absence of any intent to monopolize the production of steel in 1901 was viewed by the Court as irrelevant in 1920. In its view, the crucial consideration was the failure of the corporation to secure market domination between 1901 and 1920. By 1920 the defendant corporation’s share of steel-making capacity had declined to roughly 50 per cent; it was making no aggressive moves to raise this fraction again; and a majority of the justices were not convinced that it had the power to do so. Hence the Court reasonably concluded that no good purpose would be served by subjecting the corporation to dissolution. It was neither a monopolist nor the participant in an illegal cartel. Had the attorney general been able to explain the mechanics of price making in a market with few sellers, his effort in the steel case might have met with more success. But in 1920 neither the attorney general nor the professional economist had yet evolved a convincing theory of oligopoly.
Following the government’s defeat in the steel case, enforcement of the antitrust laws was virtually suspended for 15 years, save for the occasional prosecution of a cartel. In the prosperity of the 1920s, few political returns were to be had from efforts at trust busting. In the first years of the great depression, the nation had more important economic issues to worry about. A knowledgeable observer surveying the American legal scene in 1936 might reasonably have concluded that the antitrust laws had, for all practical purposes, expired. He would have been quite wrong. Within the next few years, antitrust enforcement was revived with astonishing vigor. The appropriations of the Antitrust Division, which had never exceeded $300,000 in any year before 1935, reached $1.3 million in 1940 and $2.3 million in 1942. In retrospect, the main reasons for the revival are clear enough.
The restrictions imposed upon cartels by the Sherman Act had been more effective than was generally realized for many years. The merits of these restrictions became apparent during the short life of the National Industrial Recovery Administration (1933–1935), when they were virtually suspended. If, in the depths of the great depression, the cartels encouraged by the NRA were not strikingly successful in raising prices, their efforts were still politically obnoxious. Also, by the late 1930s the intellectual basis had been laid for an attack upon the good oligopolist. Thanks in large measure to the work of A. R. Burns (1936), the nature of price making in an oligopoly market was much better understood. Edward Chamberlin and Joan Robinson had called attention to the wastes of imperfect competition. The monumental, if highly uneven, investigations of the Temporary National Economic Committee had begun to cast further doubts on the efficiency of large corporations. Finally, the indispensable political base for a stronger antitrust policy was furnished by the organizations of small merchants, which had been brought into being by the hardships of the depression.
The “new” Sherman Act activity. The revival of antitrust policy implementation after 1936 is often described as the “new” Sherman Act, although no new legislation of any consequence was involved. Much of the increased effort went into the harassment of cartels on an unprecedented scale, in cases that raised no novel legal or economic issues. For the first time, private suits under the antitrust laws reached significant proportions. They were subsequently to form the greater part of antitrust litigation. Thus the Administrative Office of the United States Courts reported that 378 private suits, 21 federal criminal suits, and 42 federal civil suits were begun in 1961 under the antitrust laws. The rise of private antitrust litigation can be traced to a series of decisions, notably Bigelow et al. v. RKO Pictures (327 U.S. 251, 1946), that made damage suits much easier to win. In these decisions the courts relaxed the high standards of proof of damage that had kept their dockets virtually clear of private suits before 1936.
Some advocates of antitrust policy have viewed the rise of private litigation with considerable misgivings. The private cases mostly involve a charge of price discrimination—the practice of charging different buyers different prices for the same product—since this charge can be substantiated by the introduction of accounting data that the courts respect as tangible evidence useful for showing damage. However, in the view of most economists, price discrimination is more likely to indicate the presence of competition than an effort to destroy it. But private litigation under the antitrust laws that discourage price discrimination undoubtedly helps to preserve competitors by making it more difficult for large firms to exploit economies of scale in buying. To this extent, competitors are preserved by sacrificing the gains that competition as a process would otherwise confer.
The newness of the “new” Sherman Act lay mainly in the efforts of the attorney general, beginning with the civil suit filed against the Aluminum Company of America (Alcoa) in 1937 (302 U.S. 230), to obtain judicial approval for an ambitious trust-busting program calculated to change the face of the American economy. These efforts had two main goals, a more effective control of mergers and a removal of the legal immunity conferred on the good oligopolist by the steel decision in 1920.
The first goal has been largely, if unobtrusively, achieved—so much so that the antitrust laws now make growth by merger an unattractive proposition to most large firms. The importance of this change becomes apparent when one recalls that from 1900 through 1940 at least one-half of the growth of the 100 largest industrial firms was the product of merger. Nor is federal power over mergers any longer limited to those involving substantial shares of the market. For in Brown Shoe Co. v. United States (370 U.S. 294, 1962), the Supreme Court consented to stop a manufacturer accounting for about 4 per cent of national shoe output from acquiring a chain of retail shoe stores having less than 2 per cent of national shoe sales. By any test, the condemned acquisition could have had only a trifling effect upon the shoe industry.
The government’s most energetic and spectacular efforts under the “new” Sherman Act have involved attacks on the good oligopolist. These efforts have met with but limited success. Control of the market by a single seller, monopoly in the literal sense, was condemned in the Alcoa case of 1945 even though the defendant’s record was largely free of the mergers and intimidation of rivals that had weighed so heavily against the oil and tobacco trusts in 1911. The condemnation of market control was apparently extended to oligopoly when, in 1946, the nation’s three leading manufacturers of cigarettes were convicted of violating the Sherman Act by pursuing common price policies even though the government produced no convincing evidence of collusion. In the case of United States v. New York Great Atlantic & Pacific Tea Company, filed in 1949 (CCH 1954, Trade Cases 67, 658), even the legality of size per se was placed in doubt. In this case, the country’s largest grocery chain was convicted on a criminal charge of violating the Sherman Act, although at the time of the trial it had less than 10 per cent of national grocery sales.
Still, it is one thing to admonish an established enterprise with harsh words and light fines, but it is another thing to break it up. As supporters of trust busting were soon to point out, the assault on oligopoly under the “new” Sherman Act resulted in “legal victory—economic defeat.” The courts were prepared to reprimand and fine large firms convicted of violating the antitrust laws as newly reinterpreted. They remained loath to carry punishment to the extent of dissolution and divestiture, which would destroy functioning economic units. The movie industry was dealt with severely in the Paramount case of 1948 (334 U.S. 131) and a few other sectors of the economy experienced mild trust busting. For example, in 1958 the United Fruit Company, the principal importer of bananas, was compelled to create a rival for itself from its own assets. Nevertheless, the government effort to recast the structure of the American economy by a series of civil decrees creating new firms from old has so far been largely a failure for reasons that are readily apparent. The inevitability of judicial conservatism was perhaps most succinctly explained by Judge Wyzanski in United States v. United Shoe Machinery Corp. (110 F. Supp. 295, 1953) when he wrote:
In the anti-trust field, the courts have been accorded, by common consent, an authority they have in no other branch of enacted law.… They would not have been given, or allowed to keep, such authority in the anti-trust field, and they would not so freely have altered from time to time the interpretation of its substantive provisions, if courts were in the habit of proceeding with the surgical ruthlessness that might commend itself to those seeking absolute assurance that there will be workable competition, and to those aiming at immediate realization of the social, political, and economic advantages of dispersal of power. (1953, p. 348)
Other legislation . While the comfortably imprecise language of the Sherman Act has been the main statutory foundation of antitrust policy, the act has several times been amended and expanded. The most ambitious attempts at revision came in 1914 with the passage of the Federal Trade Commission Act and the Clayton Act. The former established the Federal Trade Commission and charged it with the task of discouraging “unfair methods of competition” by cease-and-desist order. The latter, which is nearly as amorphous as the Sherman Act, which it purportedly clarifies, is credited by most authorities with three main objects: a more lenient legal treatment of sympathy strikes and secondary boycotts maintained by labor unions, tighter restrictions on corporate growth through mergers, and the outlawing of certain business practices that can threaten competition (notably price discrimination, exclusive dealing, and tie-in sales).
The 1914 legislation has enabled the Federal Trade Commission to share the making of antitrust policy with the Antitrust Division of the Justice Department. Until recently, however, this legislation has been so narrowly interpreted by the courts that it has given to federal officials little power that they could not reasonably have claimed under the Sherman Act. Thus the merger provision of the Clayton Act was a dead letter from the beginning because, in the view of the courts, it applied only to mergers effected by the purchase of securities. A firm wishing to evade the merger provision could do so simply by buying the physical assets of a rival firm. This loophole was not removed until the Celler Act of 1950.
The most controversial revision of the antitrust laws came with the passage of the Robinson–Patman Act in 1936. This long and complicated statute was designed to reduce the magnitude of the discounts that large firms could obtain by virtue of their power to buy in large quantities. (The Congressional supporters of this law purport to believe that these quantity discounts reflect the coercive bargaining power of the large buyer rather than any savings that the seller might realize in filling large orders.)
Some authorities contend that the Robinson-Patman Act is inconsistent with the aims of anti-trust policy since it is so obviously intended to protect some businessmen from the consequences of competition. Indeed, the Supreme Court ruled in the Nashville Milk case of 1958 (355 U.S. 373) that certain provisions of the act cannot be used to support private damage suits under the antitrust laws. However, the protection conferred on high-cost small business is, as yet, rather limited. A seller charged with discriminating in favor of a large buyer can defend himself by showing that the challenged discounts were “made in good faith to meet an equally low price of a competitor.” In any event, the Sherman and Clayton acts are rather regularly employed, especially in private damage suits, to protect small merchants from their more efficient rivals. And since, in a sense, protection of competitors is protection of competition, there is no reason to deny the claim of the Robinson–Patman Act to a place in the antitrust laws.
Various other actions of the courts and Congress have also operated to limit the force of the antitrust laws. Court decisions, notably United Mine Workers v. Coronado Coal Co. (259 U.S. 344, 1922) and United States v. Hutcheson (312 U.S. 219, 1941), have given labor unions a virtual immunity from prosecution. Cooperative market associations in agriculture have received Congressional exemption. The participation of American shipping firms in cartels is lawful, provided the United States Maritime Commission gives its consent. For rate agreements among railroads and motor carriers to be lawful, the parties concerned need only to secure the easily obtained approval of the Interstate Commerce Commission to enjoy immunity from antitrust prosecution. The McGuire Act of 1952 authorized manufacturers to set resale prices for wholesalers and retailers who handled their products, provided they did not collude with one another. And since the Webb-Pomerene Act of 1918, associations engaged solely in the export trade have enjoyed a limited exemption from the antitrust laws.
Economic consequences. Despite the limited resources of the enforcement agencies, the exemptions given to important industries, and judicial conservatism, the economic consequences of antitrust legislation have been considerable. Above all else, antitrust legislation has prevented the emergence of strong cartels in the American economy. In fact, the practice of oligopoly, wherein price making is a matter of silent communication between rivals, is a backhanded tribute to the effectiveness of American antitrust legislation. In countries where antitrust prosecution is not feared, price making is entrusted to the more efficient device of the cartel. Again, antitrust legislation has now made growth by merger exceedingly difficult for the largest industrial firms. And several score firms now flourishing (including most of the major American oil companies) owe their creation or preservation to antitrust suits. In short, the antitrust laws have emerged as a powerful force on the side of decentralized control and decision making in the American economy. No doubt the dispersion of industrial control is purchased by the sacrifice of some economies of large scale in research and some efficiency in the use of existing industrial capacity. The magnitude of this cost, however, is virtually impossible to measure and, in view of the political popularity of antitrust policy as presently conducted, cannot be said to excite much concern.
Given the skepticism with which the case for using the antitrust laws to shape industrial organization has been received abroad, and the inherent weakness of its intellectual foundations, its nearly universal acceptance in the United States, even among professional economists, is somewhat puzzling. The explanation is probably that in an economy as nearly self-sufficient as that of the United States, it is not enough that competition exist. It must be seen to exist. Conceivably, an automobile industry entirely controlled by General Motors might be highly sensitive to competitive pressures in the form of competing consumer goods and foreign-produced cars. But the competitive pressures acting upon General Motors are more clearly visible in the form of its remaining domestic rivals. At present writing, the policy of using antitrust legislation to discourage economic concentration has almost no influential critics in the United States. So long as limitations on corporate size do not impose discernible handicaps on American firms in their competition with foreign rivals, this situation is unlikely to change.
Donald J. Dewey
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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.
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.
In the United States, at the end of the nineteenth century, widespread business combinations known as trust agreements existed. These agreements usually involved two or more companies that combined with the purpose of raising prices and lowering output, giving the trustees the power to control competition and maximize profits at the public's expense. These trust agreements would result in a monopoly. To combat this sort of business behavior, Congress passed antitrust legislation.
In 1890 Congress passed the Sherman Antitrust Act, which forbade all combinations or conspiracies in restraint of trade. The act contained two substantive provisions. Section 1 declared illegal contracts and conspiracies in restraint of trade, and Section 2 prohibited monopolization and attempts to monopolize. When an injured party or the government filed suits, the courts could order the guilty firms to stop their illegal behavior or the firms could be dissolved. The Sherman Antitrust Act pertained only to trade within the states, and monopolies still flourished as companies found ways around the law.
In 1914 Congress passed the Clayton Act as an amendment to the Sherman Act. The Clayton Act made certain practices illegal when their effect was to lessen competition or to create a monopoly. The main provisions of this act included (1) forbidding discrimination in price, services, or facilities between customers; (2) determining that antitrust laws were not applicable to labor organizations; (3) prohibiting requirements that customers buy additional items in order to obtain products desired; and (4) making it illegal for one corporation to acquire the stock of another with intention of creating a monopoly. Because loopholes were also present in the Clayton Act, the Federal Trade Commission (FTC) was established to enforce the antitrust legislation.
Passed in 1914, the Federal Trade Commission Act provided that "unfair methods of competition in or affecting commerce are hereby declared unlawful." The FTC consists of five members appointed by the president and has the power to investigate persons, partnerships, or corporations in relation to antitrust acts. Examples of unlawful trade practices include misbranding goods quality, origin, or durability; using false advertising; mislabeling to mislead consumer about product size; and advertising or selling rebuilt goods as new. The act also gave the FTC the power to institute court proceedings against alleged violators and provided the penalties if found guilty.
The Robinson-Patman Act of 1936 strengthened the price discrimination provisions of the Clayton Act. One amendment involved the discrimination in rebates, discounts, or advertising service charges; underselling and penalties. Another provided for the exemption of non-profit institutions from price-discrimination provisions. The main purpose of this act was to justify the differences in product costs between customers and clarify the Robinson-Patman Act.
The Celler-Kefauver Antimerger Act, passed in 1950, extended the Clayton Act's injunction against mergers. Because the purpose of this act was to forbid mergers that prevented competition, corporations that were major
competitors were prohibited from merging in any manner. This amendment extended the FTC's jurisdiction to all corporations. This act, however, was not intended to stop the merger of two smaller companies or the sale of one in a failing condition. Due to court decisions that had weakened the Clayton Act, the Celler-Kefauver Antimerger Act was necessary to restrict mergers.
Although antitrust laws have contributed enormously to improving the degree of competition in the U.S. economic system, they have not been a complete success. A sizable number of citizens would like to see these laws broadened to cover professional baseball teams, labor unions, and professional organizations. Without the antitrust legislation that now exists, however, the national economy would be worse off in the end.
see also Federal Trade Commission Act of 1914; Robinson-Patman Act of 1936; Sherman Antitrust Act of 1890
Antitrust statutes. Retrieved September 6, 2005, from http://www.stolaf.edu/people/becker/antitrust/statutes/sherman.html.
"The Clayton Antitrust Act (1914)." Retrieved September 7, 2005, from http://www.stolaf.edu/people/becker/antitrust/statutes/clayton.html.
"The Federal Trade Commission Act (1914)." Retrieved September 7, 2005, from http://www.stolaf.edu/people/becker/antitrust/statutes/ftc.html.
Mueller, Charles E. (1997). "Antitrust Law and Economics Review." Retrieved September 7, 2005, from http://www.metrolink.net/~cmueller/i-overvw.html?