Definitions

antitrust legislation

United States antitrust law

United States antitrust law is the body of laws that prohibits anti-competitive behavior (monopoly) and unfair business practices. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both, or generally to violate standards of ethical behavior. Government agencies known as competition regulators, along with private litigants, apply the antitrust and consumer protection laws. The term "antitrust" was originally formulated to combat "business trusts", now more commonly known as cartels. Other countries use the term "competition law". Many countries including most of the Western world have antitrust laws of some form; for example the European Union has provisions under the Treaty of Rome to maintain fair competition, as does Australia under its Trade Practices Act 1974.

Prohibited anti-competitive behavior

A distinction between single-firm and multi-firm conduct is fundamental to the structure of U.S. antitrust law, which, as noted antitrust scholar Phillip Areeda has pointed out, "contains a 'basic distinction between concerted and independent action.' Multi-firm conduct tends to be seen as more likely than single-firm conduct to have an unambiguously negative effect and "is judged more sternly. European competition law also includes a fundamental distinction between single-firm and multi-firm conduct, but a different analytical structure is applied. In U.S. antitrust law, the Sherman Act addresses single-firm conduct by providing a remedy against "[e]very person who shall monopolize, or attempt to monopolize...any part of the trade or commerce among the several States. This prohibition does not condemn monopoly per se but only monopoly that has been acquired or maintained through prohibited conduct: Most businessmen don't like their competitors, or for that matter competition. They want to make as much money as possible and getting a monopoly is one way of making a lot of money. That is fine, however, so long as they do not use methods calculated to make consumers worse off in the long run.

With regard to multi-firm conduct, the Sherman Act addresses this by prohibiting "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce. Conduct falls within the scope of this prohibition only if some form of agreement or concerted action can be proven.

In considering multi-firm conduct, another distinction is also fundamental: the distinction between conduct that is deemed anticompetitive per se and conduct that may be found to be anticompetitive after a reasoned analysis. There does not appear to be a precedent for per se condemnation of single-firm conduct. Monopoly power alone, without some act of wrongful exclusion or other legally cognizable anticompetitive conduct, is not prohibited. To the contrary, as the respected jurist Learned Hand noted, "[t]he successful competitor, having been urged to compete, must not be turned on when he wins. U.S. antitrust law thus does not attack monopoly power obtained through "superior skill, foresight and industry".

While the prohibition against multi-firm anticompetitive goes against agreements "in restraint of trade", it is not enough to show that an agreement in some technical way restrains trade. Under U.S. law, at least, the scope of the prohibition is limited to those agreements where the restraint of trade is unreasonable:

Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.

One such obviously anticompetitive conduct as overt price fixing, for example, is placed into this per se category of conduct so clearly detrimental to competition that detailed analysis is unnecessary. Otherwise, antitrust plaintiffs are required to demonstrate, by "the facts peculiar to the business to which the restraint is applied", the nature of the challenged conduct and why it is harmful to competition.

The following types of activity are often subject to antitrust scrutiny.

  • Price fixing: An agreement between business competitors selling the same product or service regarding its pricing
  • Bid rigging: A form of price fixing and market allocation that involves an agreement in which one party of a group of bidders will be designated to win the bid
  • Geographic market allocation: An agreement between competitors not to compete within each other's geographic territories.
  • Walker Process fraud: Illegal monopolization through the maintenance and enforcement of a patent obtained via fraud on the Patent Office (the term comes from the Supreme Court case Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965).

Consumer protection

Consumer protection laws seek to regulate certain aspects of the commercial relationship between consumers and business, such as by requiring minimum standards of product quality, requiring the disclosure of certain details about a product or service (e.g., with regard to cost, or implied warranty), prohibiting misleading advertising, or prescribing financial compensation for product liability. Consumer protection laws are distinct from antitrust. Some consumer protection laws are enforced by the U.S. Federal Trade Commission, which also has antitrust responsibilities. However, many competition agencies—including the Justice Department antitrust division and the European Commission Directorate General for competition—lack authority over consumer protection.

Rationale

Antitrust laws prohibit agreements in restraint of trade, monopolization and attempted monopolization, anticompetitive mergers and tie-in schemes, and, in some circumstances, price discrimination in the sale of commodities.

Efficiency-oriented economists reject the goal of competition and instead argue that antitrust legislation should be changed to primarily benefit consumers. No Congress or administration has supported this position. These economists largely ignore the political issues that motivated the laws in the first place.

Anticompetitive agreements among competitors, such as price fixing and customer and market allocation agreements, are typical types of restraints of trade proscribed by the antitrust laws. These type of conspiracies are considered pernicious to competition and are generally proscribed outright by the antitrust laws. Resale price maintenance by manufacturers is another form of agreement in restraint of trade. Other agreements that may have an impact on competition are generally evaluated using a balancing test, under which legality depends on the overall effect of the agreement.

Monopolization and attempted monopolization are offenses that may be committed by an individual firm, even without an agreement with any other enterprise. Unreasonable exclusionary practices that serve to entrench or create monopoly power can therefore be unlawful. Allegations of predatory pricing by large companies can be the basis for a monopolization claim, but it is difficult to establish the required elements of proof. Large companies with huge cash reserves and large lines of credit can stifle competition by engaging in predatory pricing; that is, by selling their products and services at a loss for a time, in order to force their smaller competitors out of business. With no competition, they are then free to consolidate control of the industry and charge whatever prices they wish. At this point, there is also little motivation for investing in further technological research, since there are no competitors left to gain an advantage over.

High barriers to entry such as large upfront investment, notably named sunk costs, requirements in infrastructure and exclusive agreements with distributors, customers, and wholesalers ensure that it will be difficult for any new competitors to enter the market, and that if any do, the trust will have ample advance warning and time in which to either buy the competitor out, or engage in its own research and return to predatory pricing long enough to force the competitor out of business.

From an economics perspective, the relatively recent industrial organization research has focused on construction of microeconomic models that predict and/or explain the prevalence of imperfectly competitive markets and deviations from competitive behavior, partly as a response to the criticisms of antitrust laws and policies by the Chicago School and by members of the law and economics school of thought.

Enforcement of United States Antitrust Law

In the United States, there are both state and federal antitrust laws. Enforcement of these laws takes three forms:

First, the federal government, via both the Antitrust Division of the United States Department of Justice and the Federal Trade Commission, can bring civil lawsuits enforcing the laws. The United States Department of Justice alone may bring criminal antitrust suits under federal antitrust laws. Perhaps the most famous antitrust enforcement actions brought by the federal government were the break-up of AT&T's local telephone service monopoly in the early 1980s and its actions against Microsoft in the late 1990s.

Second, state attorneys general may file suits to enforce both state and federal antitrust laws.

Third, private civil suits may be brought, in both state and federal court, against violators of state and federal antitrust law. Federal antitrust laws, as well as most state laws, provide for treble damages against antitrust violators in order to encourage private lawsuit enforcement of antitrust law. Thus, if a company is sued for monopolizing a market and the jury concludes the conduct resulted in consumers' being overcharged $200,000, that amount will automatically be tripled, so the injured consumers will receive $600,000. The United States Supreme Court summarized why Congress authorized private antitrust lawsuits in the case Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251, 262 (1972):

Every violation of the antitrust laws is a blow to the free-enterprise system envisaged by Congress. This system depends on strong competition for its health and vigor, and strong competition depends, in turn, on compliance with antitrust legislation. In enacting these laws, Congress had many means at its disposal to penalize violators. It could have, for example, required violators to compensate federal, state, and local governments for the estimated damage to their respective economies caused by the violations. But, this remedy was not selected. Instead, Congress chose to permit all persons to sue to recover three times their actual damages every time they were injured in their business or property by an antitrust violation. By offering potential litigants the prospect of a recovery in three times the amount of their damages, Congress encouraged these persons to serve as "private attorneys general."

Criticism

There are two main kinds of monopolies: de jure monopolies, which are those that are protected from competition by government actions and de facto monopolies, which are not protected by law from competition and are simply the only supplier of a good or service. Advocates of laissez-faire capitalism advocate that the only type of monopoly that should be broken up is what they call a coercive monopoly, that is the persistent, exclusive control of a vitally needed resource, good, or service such that the community is at the mercy of the controller, and where there are no suppliers of the same or substitute goods to which the consumer can turn. In such a monopoly, the monopolist is able to make pricing and production decisions without an eye on competitive market forces and is able to curtail production to price-gouge consumers. Laissez-faire advocates argue that such a monopoly can only come about through the use of physical coercion or fraudulent means by the corporation or by government intervention and that there is no case of a coercive monopoly ever existing that was not the result of government policies.

Free market economist Milton Friedman states that he initially agreed with the underlying principles of antitrust laws (breaking up monopolies and oligopolies and promoting more competition), but that he came to the conclusion that they do more harm than good.

Critics also argue that the empirical evidence shows that "predatory pricing" does not work in practice and is better defeated by a truly free market than by anti-trust laws (see Criticism of the theory of predatory pricing).

Thomas Sowell argues that, even if a superior business drives out a competitor, it does not follow that competition has ended:

In short, the financial demise of a competitor is not the same as getting rid of competition. The courts have long paid lip service to the distinction that economists make between competition—a set of economic conditions—and existing competitors, though it is hard to see how much difference that has made in judicial decisions. Too often, it seems, if you have hurt competitors, then you have hurt competition, as far as the judges are concerned.

Alan Greenspan argues that the very existence of antitrust laws discourages businessmen from some activities that might be socially useful out of fear that their business actions will be determined illegal and dismantled by government. In his essay entitled Antitrust, he says: "No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born. No one can ever compute the price that all of us have paid for that Act which, by inducing less effective use of capital, has kept our standard of living lower than would otherwise have been possible." Those, like Greenspan, who oppose antitrust tend not to support competition as an end in itself but for its results—low prices. As long as a monopoly is not a coercive monopoly where a firm is securely insulated from potential competition, it is argued that the firm must keep prices low in order to discourage competition from arising. Hence, legal action is uncalled for and wrongly harms the firm and consumers.

Proponents of the Chicago school of economics are generally suspicious (and critical) of government intervention in the economy, including antitrust laws and competition policies. Judge Robert Bork's writings on antitrust law, along with those of Richard Posner and other law and economics thinkers, were heavily influential in causing a shift in the U.S. Supreme Court's approach to antitrust laws since the 1970s.

Thomas DiLorenzo, an adherent of the Austrian school of economics, found that the "trusts" of the late 19th century were dropping their prices faster than the rest of the economy, and he holds that they were not monopolists at all.

History of antitrust

The antitrust laws comprise what the Supreme Court calls a "charter of freedom", designed to protect the core republican values regarding free enterprise in America. The main goal was never to protect consumers, but to prohibit the use of power to control the marketplace. Although "trust" had a technical legal meaning, the word was commonly used to denote big business, especially a large, growing manufacturing conglomerate of the sort that suddenly emerged in great numbers in the 1880s and 1890s. Indeed, at this time hundreds of small short-line railroads were being bought up and consolidated into giant systems. (Separate laws and policies emerged regarding railroads and financial concerns such as banks and insurance companies.) Advocates of strong antitrust laws argued the American economy to be successful requires free competition and the opportunity for individual Americans to build their own businesses. As Senator John Sherman put it, "If we will not endure a king as a political power we should not endure a king over the production, transportation, and sale of any of the necessaries of life." Congress passed the Sherman Antitrust Act almost unanimously in 1890, and it remains the core of antitrust policy. The Act makes it illegal to try to restrain trade or to form a monopoly. It gives the Justice Department the mandate to go to federal court for orders to stop illegal behavior or to impose remedies.

Public officials during the Progressive Era put passing and enforcing strong antitrust high on their agenda. President Theodore Roosevelt sued 45 companies under the Sherman Act, while William Howard Taft sued 75. In 1902, Roosevelt stopped the formation of the Northern Securities Company, which threatened to monopolize transportation in the Northwest (see Northern Securities Co. v. United States).

One of the more well known trusts was the Standard Oil Company; John D. Rockefeller in the 1870s and 1880s had used economic threats against competitors and secret rebate deals with railroads to build what was called a monopoly in the oil business, though some minor competitors remained in business. In 1911 the Supreme Court agreed that in recent years (1900-1904) Standard had violated the Sherman Act (see Standard Oil Co. of New Jersey v. United States). It broke the monopoly into three dozen separate companies that competed with one another, including Standard Oil of New Jersey (later known as Exxon and now ExxonMobil), Standard Oil of Indiana (Amoco), Standard Oil Company of New York (Mobil, again, later merged with Exxon to form ExxonMobil), of California (Chevron), and so on. In approving the breakup the Supreme Court added the "rule of reason": not all big companies, and not all monopolies, are evil; and the courts (not the executive branch) are to make that decision. To be harmful, a trust had to somehow damage the economic environment of its competitors.

United States Steel Corporation, which was much larger than Standard Oil, won its antitrust suit in 1920 despite never having delivered the benefits to consumers that Standard Oil did. In fact it lobbied for tariff protection that reduced competition, and so contending that it was one of the "good trusts" that benefited the economy is somewhat doubtful. Likewise International Harvester survived its court test, while other trusts were broken up in tobacco, meatpacking, and bathtub fixtures. Over the years hundreds of executives of competing companies who met together illegally to fix prices went to federal prison.

One problem some perceived with the Sherman Act was that it was not entirely clear what practices were prohibited, leading to businessmen not knowing what they were permitted to do, and government antitrust authorities not sure what business practices they could challenge. In the words of one critic, Isabel Paterson, "As freak legislation, the antitrust laws stand alone. Nobody knows what it is they forbid." In 1914 Congress passed the Clayton Act, which prohibited specific business actions (such as price discrimination and tying) if they substantially lessened competition. At the same time Congress established the Federal Trade Commission (FTC), whose legal and business experts could force business to agree to "consent decrees", which provided an alternative mechanism to police antitrust.

American hostility to big business began to decrease after the Progressive Era. For example,Ford Motor Company dominated auto manufacturing, built millions of cheap cars that put America on wheels, and at the same time lowered prices, raised wages, and promoted manufacturing efficiency. Ford became as much of a popular hero as Rockefeller had been a villain. Welfare capitalism made large companies an attractive place to work; new career paths opened up in middle management; local suppliers discovered that big corporations were big purchasers. Talk of trust busting faded away. Under the leadership of Herbert Hoover, the government in the 1920s promoted business cooperation, fostered the creation of self-policing trade associations, and made the FTC an ally of "respectable business".

During the New Deal, likewise, attempts were made to stop cutthroat competition, attempts that appeared very similar to cartelization, which would be illegal under antitrust laws if attempted by someone other than government. The National Recovery Act (NRA) was a short-lived program in 1933–35 designed to strengthen trade associations, and raise prices, profits and wages at the same time. The Robinson-Patman Act of 1936 sought to protect local retailers against the onslaught of the more efficient chain stores, by making it illegal to discount prices. To control big business the New Deal policymakers preferred federal and state regulation—controlling the rates and telephone services provided by American Telephone & Telegraph Company (AT&T), for example—and by building up countervailing power in the form of labor unions.

By the 1970s fears of "cutthroat" competition had been displaced by confidence that a fully competitive marketplace produced fair returns to everyone. The fear was that monopoly made for higher prices, less production, inefficiency and less prosperity for all. As unions faded in strength, the government paid much more attention to the damages that unfair competition could cause to consumers, especially in terms of higher prices, poorer service, and restricted choice. In 1982 the Reagan administration used the Sherman Act to break up AT&T into one long-distance company and seven regional "Baby Bells", arguing that competition should replace monopoly for the benefit of consumers and the economy as a whole. The pace of business takeovers quickened in the 1990s, but whenever one large corporation sought to acquire another, it first had to obtain the approval of either the FTC or the Justice Department. Often the government demanded that certain subsidiaries be sold so that the new company would not monopolize a particular geographical market. In 1999 a coalition of 19 states and the federal Justice Department sued Microsoft. A highly publicized trial found that Microsoft had strong-armed many companies in an attempt to prevent competition from the Netscape browser. In 2000 the trial court ordered Microsoft split in two to punish it, and prevent it from future misbehavior, however the Court of Appeals reversed the decision, removed the judge from the case for improperly discussing the case while it was still pending with the media. With the case in front of a new judge, Microsoft and the government settled, with the government dropping the case in return for Microsoft agreeing to cease many of the practices the government challenged. In his defense, CEO Bill Gates argued that Microsoft always worked on behalf of the consumer and that splitting the company would diminish efficiency and slow the pace of software development.

Exemptions to antitrust laws

The National Football League earned a special antitrust exemption encoded in federal law as part of the AFL-NFL merger, in exchange for certain conditions, such as not directly competing with college or high school football.

Newspapers under joint operating agreements are also allowed limited antitrust immunity under the Newspaper Preservation Act of 1970, , et seq.

In addition, the petitioning for reduced competition is not considered a violation of antitrust laws and is considered legal under the Noerr-Pennington doctrine.

See also

References

Further reading

  • Areeda, Phillip and Louis Kaplow, Antitrust Analysis: Problems, Texts, Cases (1997)
  • Oliver Black. Conceptual Foundations of Antitrust (2005)
  • Bork, Robert H. (1993). The Antitrust Paradox. New York: Free Press. ISBN 0-02-904456-1.
  • Choi, Jay Pil (ed.) (2007). Recent Developments in Antitrust: Theory and Evidence. The MIT Press. ISBN 978-0-262-03356-5.
  • Antonio Cucinotta, ed. Post-Chicago Developments in Antitrust Law (2003)
  • David S Evans. Microsoft, Antitrust and the New Economy: Selected Essays (2002)
  • Herbert Hovenkamp. "Chicago and Its Alternatives", Duke Law Journal, Vol. 1986, No. 6 (Dec., 1986) , pp. 1014–1029
  • John E Kwoka and Lawrence J White, eds. The Antitrust Revolution: Economics, Competition, and Policy (2003)
  • Richard Posner, Antitrust Law: An Economic Perspective. (1976).

Historical

  • Louis Brandeis, The Curse of Bigness (1934).
  • Alfred Chandler, The Visible Hand: The Managerial Revolution in American Business (1977).
  • J. Dirlam & A. Kahn, Fair Competition: The Law and Economics of Antitrust Policy (1954).
  • Joseph Dorfman, The Economic Mind in American Civilization 1865–1918 (1949).
  • Freyer, Tony. Regulating Big Business: Antitrust in Great Britain and America, 1880–1990. (1992)
  • Walter Hamilton & I. Till, Antitrust in Action. Washington: U.S. Government Printing Office, 1940.
  • Richard Hofstadter, "What Ever Happened to the Antitrust Movement?" in The Paranoid Style in American Politics and Other Essays. (1965).
  • W. Letwin, Law and Economic Policy in America: The Evolution of the Sherman Antitrust Act (1965).
  • Peritz, Rudolph J. R. "Three Visions of Managed Competition, 1920–1950", Antitrust Bulletin, Spring 1994 39 #1 273–287.
  • Edwin Rozwenc, ed. Roosevelt, Wilson and The Trusts. (1950), readings
  • George Stigler, The Organization of Industry (1968).
  • George Stocking & M. Watkins, Monopoly and Free Enterprise. (1951).
  • Hans Thorelli, The Federal Antitrust Policy: Origination of an American Tradition (1955).

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