Antitrust laws are federal and state statutes to protect trade and commerce from unlawful restraints, price discriminations, price fixing, and monopolies.
Antitrust laws reflect the economic harm caused by a monopoly. Antitrust laws aim to stop abuses of market power by big companies and, sometimes, to prevent corporate mergers and acquisitions that would create or strengthen a monopolist. There have been big differences in antitrust policies both among countries and within the same country over time. This has reflected different ideas about what constitutes a monopoly and, where there is one, what sorts of behavior are abusive.
Theoretical Groundings of Competition Policy
Competition policy is premised on the belief that competition has a positive effect on free markets, and should be encouraged, and that monopoly has corrupting political effects that must be avoided.
Where many manufacturers provide the same product, each will try to increase its sales by finding ways to make its own product more attractive than those of its competitors. Some manufacturers will try to sell the product at a lower cost, while others will try to improve the quality of the product, or develop innovative new features to attract consumers.
However, if one manufacturer controls the entire market for a product, or if all manufacturers cooperate in controlling such a market, then the incentive to reduce prices and improve quality disappears. Furthermore, a manufacturer or group of manufacturers with sufficient power over the market can prevent new competitors from entering the field, either by acquiring the competitor, or by reducing prices just long enough to drive the competitor out of business.
Historically, American antitrust law was premised on the fear that the temptation for a corporation to seek and use government power to protect its monopoly profits (called "rents") would corrupt and injure the political process. Economist George Stigler and the Chicago School of Economics specificially pointed to the dangers of "rent seeking" as a corruption to be vigilantly opposed.
The History of Antitrust law
One of the earliest significant antitrust cases was that of Darcy v. Allein, in which a court of England voided a grant by Queen Elizabeth I purporting to give the appellant a monopoly over the importation and sale of playing cards throughout England. The Darcy court found the grant to be against public policy for reasons including the likelihood that the monopolist would be inclined to rest on a shoddy product, and that others in the business of making playing cards would be unfairly rendered unemployed.
England enacted a statutory prohibition on monopolies in 1624 American states enacted individual prohibitions against monopolies as early as 1641, with the Massachusetts Bay Colony stating that "there shall be no monopolies granted or allowed among us but of such new inventions as are profitable to the country, and that for a short time".
Antitrust Policy in the United States
The main purpose of antitrust laws is to reinforce and protect the core republican values regarding free enterprise in America. Although "trust" had a technical legal meaning, the word was commonly used to denote big business, especially a large, growing manufacturing or retailing company of the sort that suddenly emerged in great numbers in the 1880s and 1890s. (Separate laws and policies emerged regarding railroads and financial concerns such as banks and insurance companies.) Republicanism required free competition, and the opportunity for Americans to pursue their own business without being crushed by an economic colossus. 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." The Sherman Antitrust Act passed Congress almost unanimously in 1890. and 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 the illegal behavior or to impose remedies. Presidents Theodore Roosevelt and William Howard Taft sued scores of companies under the Sherman Act. In the first major episode, the government stopped the formation of the "Northern Securities Company," which threatened to monopolize transportaion in the northwest. The most notorious of the 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 a monopoly in the oil business. A federal criminal lawsuit alleged the illegal rebates continued after 1900. In 1911 the Supreme Court upheld the court decision against Standard Oil and broke the monopoly into three dozen separate companies that eventually competed with one another, including Standard Oil of New Jersey (later known as Exxon and Exxon-Mobil), Standard Oil of Indiana (Amoco), of New York (Mobil), of California (Chevron), and so on.
In approving the breakup of Standard Oil the Supreme Court added the "Rule of reason": not all big companies, and not all monopolies, are evil. They had to somehow damage the economic environment of their competitors. Roosevelt for his part distinguished between "good trusts"—which built the world's greatest economy—and bad ones which preyed on smaller fry. Thus U.S. Steel Corporation, which was much larger than Standard Oil, won its antitrust suit in 1920 because it proved in court that it was well behaved. Labor unions, whose use of boycotts and strikes was banned by courts as a restraint of trade, hated the original Sherman Act; they were given relief in the Clayton Act of 1914.
The biggest problem under Sherman was that businessmen did not know what was allowed and what was not. Therefore, in 1914 Congress set up the Federal Trade Commission (FTC), which defined anti-competitive behavior, and provided an alternative mechanism to police anti-trust.
America adjusted to bigness after 1910. Henry Ford dominated auto manufacturing, but he built millions of cheap cars that put America on wheels, and at the same time lowered prices, raised wages, and promoted efficiency. Ford became as much of a popular hero as Rockefeller had been a villain; talk of trust busting aded away. In the 1920s and 1930s the threat to the free enterprise system seemed to come from unrestricted cutthroat competition, which drove down prices and profits and made for inefficiency. 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. The New Deal likewise tried to stop cutthroat competition. The NRA (1933–35) 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 preferred federal and state regulation—controlling the rates and telephone services provided by ATT 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. 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 1983 the Reagan administration used the Sherman Act to break up ATT, a nationwide telephone monopoly, into one long-distance company and six regional local service companies, arguing that competition should replace monopoly for the benefit of consumers and the economy as a whole. In 1999 a coalition of 19 states and the federal Justice Department sued Microsoft. A highly publicized trial demonstrated that Bill Gates—the new Rockefeller—had strong-armed many companies to squelch the competitive threat posed by the Netscape browser. In 2000 the trial court ordered Microsoft split in two to punish it, and prevent it from future misbehavior. Gates argued that Microsoft always worked on behalf of the consumer, and that splitting the company would diminish efficiency and slow down the torrid pace of software development.
Antitrust law in the U.S
In the United States, monopoly policy has been built on the Sherman Antitrust Act of 1890. This prohibited contracts or conspiracies to restrain trade or, in the words of a later act, to monopolize commerce. In the early 20th century this law was used to reduce the economic power wielded by so-called "robber barons", such as JP Morgan and John D. Rockefeller, who dominated much of American industry through huge trusts that controlled companies' voting shares. Du Pont chemicals, the railroad companies and Rockefeller's Standard Oil, among others, were broken up. In the 1970s the Sherman Act was turned (ultimately without success) against IBM, and in 1982 it secured the break-up of AT&T's nationwide telecoms monopoly.
In the 1980s a more laissez-faire approach was adopted, underpinned by economic theories from the Chicago school. These theories said that the only justification for antitrust intervention should be that a lack of competition harmed consumers, and not that a firm had become, in some ill-defined sense, too big. Some monopolistic activities previously targeted by antitrust authorities, such as predatory pricing and exclusive marketing agreements, were much less harmful to consumers than had been thought in the past. They also criticized the traditional method of identifying a monopoly, which was based on looking at what percentage of a market was served by the biggest firm or firms, using a measure known as the herfindahl-hirschman index. Instead, they argued that even a market dominated by one firm need not be a matter of antitrust concern, provided it was a contestable market.
In the 1990s American antitrust policy became somewhat more interventionist. A high-profile lawsuit was launched against Microsoft in 1998. The giant software company was found guilty of anti-competitive behavior, which was said to slow the pace of innovation. However, fears that the firm would be broken up, signaling a far more interventionist American antitrust policy, proved misplaced. The firm was not severely punished.
Major Antitrust laws
- Sherman Antitrust Act (1890)
- Clayton Antitrust Act (1914)
- Federal Trade Commission Act (1914)
- Robinson-Patman Act (1936).
Antitrust laws in other countries
In the UK, antitrust policy was long judged according to what policymakers decided was in the public interest. At times this approach was comparatively permissive of mergers and acquisitions; at others it was less so. However, in the mid-1980s the UK followed the American lead in basing antitrust policy on whether changes in competition harmed consumers. Within the rest of the European union several big countries pursued policies of building up national champions, allowing chosen firms to enjoy some monopoly power at home which could be used to make them more effective competitors abroad. However, during the 1990s the European Commission became increasingly active in antitrust policy, mostly seeking to promote competition within the EU.
In 2000, the EU controversially blocked a merger between two American firms, GE and Honeywell; the deal had already been approved by America's antitrust regulators. The controversy highlighted an important issue. As globalization increases, the relevant market for judging whether market power exists or is being abused will increasingly cover far more territory than any one single economy. Indeed, there may be a need to establish a global antitrust watchdog, perhaps under the auspices of the world trade organization.
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