The purpose of anti-trust laws is to keep a healthy level of competition in the marketplace by discouraging monopolies and penalizing unfair business practises. In the United States, this aspect of commerce is governed by Title 15 of the United States Code, including the Sherman Antitrust Act (1890), the Wilson-Gorman Tariff Act (1894), and the Clayton Antitrust Act (1914). These anti-trust acts are not about trusts as such. The name is a carryover from a time when monopolistic businesses were often held in a trust.
The reasoning behind anti-trust laws is that any form of restraint in trade, such as monopolies, anticompetitive mergers, or price fixing, makes it difficult or impossible for new competitors to compete on an even playing field, or even to enter the market. Without effective competition, there is nothing to challenge whatever price the dominant supplier wants to put on his product. There is also no incentive for the dominant supplier to improve his product.
Thus, the basic goal of anti-trust laws is to protect economic freedom and opportunity by encouraging competition. Healthy competition should result in lower prices, a wider range of choices, and constant product innovation. Companies which have been tempered by healthy domestic competition may also be more likely to succeed on the international market.
The Sherman Act takes a heavy-handed approach to this problem. The basic intent of the Sherman Act is to protect competition and the competitive landscape. However, it was written to be the hammer to which every trade-restraining commercial contract looks like a nail. In a literal reading, it overturns any contract, merger, or conspiracy which restrains trade in any way whatsoever.
Unfortunately, that same literal reading would also overturn every single commercial contract, even contracts as basic as employment contracts. A healthy competitive market needs enforceable commercial agreements. As a result, the Sherman Act is usually interpreted based on common law tradition and precedent.
The Rule of Reason, which was developed and applied in the case of Addyson Pipe and Steel Co. v. United States (1899), states that anti-trust laws should only apply to cartels and contracts which unreasonably restrain trade. Standard Oil Co. of New Jersey v. United States (1911) supported this interpretation by using the Rule of Reason to apply only to those contracts or acts which directly diminish competition in order to enhance prices. Here, the court held that the Sherman Act did not apply to voluntary restraint of commerce among all parties affected by the trade, as in an employment contract.
The Rule of Reason does allow monopolies under some circumstances. In general, a monopoly is not considered to be harmful if the monopoly results from application of superior skill, ability, or a new technology. For example, developing the first computer for the marketplace is a legal monopoly, until others catch up to the tecnology and develop cometing models.
A monopoly, cartel, or combination is considered to be harmful under the Sherman Act if its purpose or potential is to harm trade based on artificial restraints. For example, price fixing is not an application of superior skill or ability. Similarly, using a corporation’s market dominance to force other businesses in the same field to sell out is not an application of superior skill or ability.
Companies, combinations, and cartels which engage in this kind of behavior may be challenged under anti-trust laws. If found to be in violation of those laws, the court can order the company or cartel to be broken up into smaller, independent companies.