Competition is the cornerstone of a free market society. Because of competition, inventors of new products are encouraged to innovate and to produce their wares for consumers at prices that are affordable and fair. Most new products start out on the market at their highest price, and because of the free flow of competition, the best products remain on the market at the best prices, since consumers reject inferior ones, or ones that are poorly priced. This benefits nearly everyone who lives in a free market economy.
However, because of unscrupulous business practices, there are sometimes impediments to the free flow of that competition. It is this fact that is behind the origin of anti-trust legislation.
In Europe, antitrust law is referred to as “competition law”. Competition laws developed in Europe mainly after the Second World War. In the United States of America, such laws were developed much earlier. One major difference between European and American laws is the role played by the state. Since in Europe, the state is generally more involved in the economy, it is also more involved in its competition laws.
The basis of antitrust law in the U.S. is the Sherman Antitrust Act of 1890. Its chief author was John Sherman, a U.S. Senator from Ohio who served as Secretary of the Treasury under President Hayes. Sherman was an expert on the regulation of commerce. The Sherman Act was passed as a result of great public opposition to huge trusts and monopolies formed by large corporations after the Civil War, such as Standard Oil Company and the railroads. The Sherman Act was broadly worded and did not specify in great detail what would constitute its violations. However, the Supreme Court has interpreted the Sherman Act and has shown that it applies only to unreasonable restraints of trade.
In general, a “restraint of trade” is an agreement between two or more persons or organizations that affects the competitive process. The emphasis here is on the word “agreement”. It is quite possible for a monopoly or large corporation to exist without violating any anti-trust laws, as long as its status was obtained through legal and reasonable conduct. But when the owners make any type of agreements with one another that affect the market and the freedom of others to compete for it, the law may intervene. The types of analyses that are applied by courts to violations of the Sherman Act can be divided into two categories. “Per se” offenses are those which have been deemed illegal and unacceptable and are easier to define and prosecute than the ones that are defined under a second category known as the “rule of reason”.
“Per se” violations of the Sherman Act and subsequent antitrust laws are offenses that are usually prohibited outright. Examples of this are price fixing, bid rigging, tying, group boycotts, and market or customer allocations.
Price fixing is establishing the price of a product or service instead of allowing the price to be determined by the action of a free market. This can happen when two competitors of a similar product fix the price of the product to prevent discounting and maintain their profit margins.
When competitors agree in advance which one of them will win a bid for a commercial, government or other type of contract, the bidding is rigged. For example, two construction firms, Firm A and Firm B, may both bid for a large building project. Together, the two firms decide that Firm B will submit the superior bid and will win the contract. Both firms also agree that when Firm B is awarded the contract, it will subcontract some of the work to Firm A. This type of anti-competitive behavior is illegal and worthy of penalty.
Illegal product tying arrangements occur when a company makes a product available for purchase only if the buyer is willing to buy another product along with it that is not a component of the original product. For example, Firm A is a leader in the hammer industry. Firm A decides to begin producing its own nails in addition to hammers. In order to promote the sale of its nails, it begins to require the consumer to purchase the nails along with the hammers. After Firm A begins to do this, other firms in the nail industry have a great decrease in demand for their product. What Firm A has done is illegal because it has used its success in the hammer industry to sell nails in a non-competitive way.
Tying is one of the most common violations of antitrust law and is often not penalized. The bundling of products together is so common that most consumers do not even notice it, and in fact, they expect it to happen. How many people get channels on their televisions from cable companies that they never watch? How many drivers have gadgets on their cars that they have no idea how to use, and did not want, but they came with the car when purchased?
An agreement between competitors not to do business with targeted individuals or firms may result in an illegal group boycott. For example, the Federal Trade Commission (FTC) has challenged the business practices of several groups of competing health care providers, charging that they have participated in an illegal group boycott because of their refusal (except in the case of jointly agreed upon terms) to deal with insurance companies or other purchasers of their services.
In cases where there is not a specific “per se” violation of antitrust law, but where the business practices of competitors are questionable because they may impair the functioning of the free market, the “rule of reason” is sometimes applied in determining whether or not a penalty is warranted. The “rule of reason” requires a full weighing and evaluation of the potential harms or benefits to competition of a given conduct to determine whether or not it is a violation of anti trust law.
After the passing of the Sherman Act, other legislation to monitor and govern business activities was created to address various issues that came up during the time that followed. In 1914, Congress enacted the Federal Trade Commission Act, establishing the FTC and giving it the power to enforce antitrust laws. In the same year, Congress also enacted the Clayton Antitrust Act, which gave the attorney general of each state the ability to enforce the federal antitrust laws. Later amendments to the Clayton Act include the Robinson-Pitman Act of 1936 and the Hart-Scott-Rodin Act of 1976, which is very important today because it requires companies intending to merge to notify the federal government before the transaction is finalized. This enables the government’s enforcement agencies to review the potential effects that such mergers would have upon competition in the free market.
Antitrust laws can be enforced either by public or private parties. In the U.S., the main enforcing public parties are the Department of Justice (DOJ) and the FTC. The DOJ has its own Antitrust Division. State attorneys general can also enforce the federal laws and may participate in investigations of infractions along with the DOJ or the FTC. Many private parties have also brought actions to court against businesses or corporations because of antitrust issues. Often, the private parties act in groups, in a class action lawsuit.
To quote Adam Smith, author of “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776), “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest”. In other words, the baker isn’t asking anyone if they’d enjoy his great bread with their meal. The baker wants people to give him money, so he wants to produce the best bread on the market so that they don’t buy their bread from someone else. In a truly competitive, free market, this is the driving motivation behind the production of goods and services, and it ensures that consumers get a good and fair deal. Antitrust law is designed not to protect the competitor, but to protect competition itself, and it is that competition that creates the prosperity and growth of a free market economy.