Antitrust

Antitrust is an American legal term. The purpose of antitrust policy is to limit or prevent the creation of monopoly power and to preserve competition by regulating business conduct. The United States was the first country to introduce legislation for that purpose, and has taken the lead in developing its rationale and methods of implementation. In the post-war years its example has been widely followed in Europe (especially in the European Union) and elsewhere

The Antitrust Concept

The term "antitrust" originated from the nineteenth–century practice of placing the stock of a large number of formerly competing companies into the hands of trustees who were then able to exercise a very substantial degree of commercial and political influence. Public indignation at what were perceived as the consequent abuses by "big business" led in 1890 to the passing of legislation that made illegal any attempt to monopolize any part of trade or commerce.

U.S. antitrust history

The very rapid, unexpected growth of railroads and industrial corporations after 1870 caused two troubling political issues. In terms of competition, would small companies be swallowed up against their will or forced out of business? Would the corporations became political powers that undercut the national commitment to republican and democratic values?. In the late 1880s the main focus of the antitrust debates was 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 after the late 1870s. Separate laws and policies emerged regarding industry, 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 it remains the core of U.S. antitrust policy. The Sherman Act makes it illegal to try to restrain trade or to form a monopoly. It empowers the Justice Department 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 transportation in the northwest. Boston lawyer Louis Brandeis argued that bigness was likely badness, an idea that won the ear of Woodrow Wilson and became the cornerstone of the New Freedom campaign in 1912. After his victory in 1912, Wilson nominated Brandeis to the Supreme Court in 1916, but intense business opposition was unable to block his confirmation.

In terms of public opinion the most notorious of the trusts was the Standard Oil Company; under John D. Rockefeller in the 1870s and 1880s it 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. However the basic popular antipathy to oil companies lived on, into the 21st century.

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.

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. 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.

America adjusted to bigness after 1910. Henry Ford dominated auto manufacturing, but his policies, called Fordism, 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 faded 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 National Recovery Administration (1933-35) was a short-lived program in 1933-35 designed to reduce competition, 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 allowing the Texas Railroad Commission to control oit output and prices--and by building up countervailing power in the form of labor unions and farm organization.

Court interpretations

U.S. Supreme Court "rule of reason" interpretation of the Sherman Act attributed to it objectives which go beyond the pursuit of economic efficiency. In 1945 Judge Learned Hand attributed to its legislators the desire to put an end to great aggregations of capital because of the helplessness of the individual before them, and in 1962, the Court attributed to Congress the policy of protecting small businesses even at the expense of higher prices. The use of antitrust to attack big business and to protect small firms continued to be a feature of antitrust policy until appointees of the Reagan administration took steps to limit that use of the legislation, following a campaign by economists and lawyers of the Chicago School of Economics, spearheaded by George Stigler to make the economic welfare of consumers the sole criterion for antitrust rulings.

The 1890 legislation was at first unworkable because its prohibition was so general as to make criminal offenses of a wide range of well-established and harmless business practices. A Supreme Court ruling in 1911 provided a workable interpretation under which most forms of business behavior could be judged by their effect rather than solely by their form.

Antitrust Law

The U.S. Sherman Act of 1890 states that

Every contract, combination in the form of trust … or otherwise, or conspiracy in restraint of ::trade … is hereby declared illegal. … Every person who shall monopolize or attempt to monopolize  ::any part of trade or commerce shall be deemed guilty of a felony.

The Sherman Act was supplemented in 1914 by the more specific terms of the Clayton Act. Among practices made unlawful under that act were price discrimination, exclusive dealing, tie-in sales, and interlocking directorates – subject in each case to the condition that the purpose or effect of the practice would be 'substantially to lessen competition'. Section 2, dealing with price discrimination, was amended in 1936 by the Robinson-Patman Act, which made it unlawful to discriminate in price between different purchasers of goods of like grade and quality where the effect would be substantially to lessen competition (unless the price differentials would only compensate for differences in costs of supply). Section 7 of the Clayton Act, as amended in 1950, prohibited mergers which would substantially lessen competition. The Clayton Act and its amendments do not create criminal offenses.

Antitrust law is enforced in the courts and its interpretation is subject to legal precedents, but Supreme Court rulings have from time to time brought about major changes in its application. One of the major changes was the introduction by the Supreme Court in 1911 of the rule of reason, which ruled that only combinations and contracts unreasonably restraining trade are subject to actions under the anti-trust laws and that the possession of size or monopoly power is not illegal per se. A change was introduced in Continental TV v. GTE Sylvania (1977), with the ruling that the resulting gains in efficiency were admissible as a defense of some vertical restraints.

Further changes have in effect been introduced by guidelines issued by the Federal Trade Commission and the Department of Justice,.

Enforcement and penalties

A violation of the Sherman Act is a criminal offense, punishable by fines or imprisonment. Injunctions may be granted by the courts to prevent anti-competitive behavior or to require divestiture of parts of a monopoly. Under the provisions of the Clayton Act injured parties may bring actions for triple damages, that is to say three times the amount of the damage actually sustained. Federal responsibility for enforcement of the legislation lies with the Federal Trade Commission for civil actions and the Department of Justice for civil actions and criminal prosecutions. (The Federal Trade Commission and the courts have the power to enforce Sections 2, 3, 7, and 8 of the Clayton Act and the Federal Trade Commission Act has been interpreted to give the Federal Trade Commission jurisdiction over violations of the Sherman Act.) Most states also have their own antitrust laws, which are similar to the federal antitrust laws, but which generally apply to offenses committed within a state's boundary. They are enforced similarly to federal laws by individual actions or through the offices of a state's attorney general.

The Implementation of Antitrust Law

In the first phase of the implementation of the antitrust legislation, priority was given to attempts to break up existing monopolies and prevent the formation of others. In the first major episode, trustbuster Theodore Roosevelt in 1904 had the courts dissolve the "Northern Securities Company," which threatened to monopolize transportation in the northwest. President William Howard Taft originated even more trust-busting federal lawsuits, and in 1911 the Supreme Court upheld the lower court decision against Standard Oil and broke it into three dozen separate companies. In 1983 the Reagan administration used the Sherman Act to break up AT&T, a nationwide telephone monopoly, into one long-distance company and six regional local service companies. In 1999 a coalition of 19 states and the Department of Justice sued Microsoft over its attempt to remove the competitive threat posed by the Netscape browser, and in 2000 a trial court ordered Microsoft to be split in two; but Microsoft argued successfully on appeal that splitting the company would diminish efficiency and slow the pace of software development. The admissibility by that time of efficiency defenses had made it more difficult to make a successful case for the breaking up of large firms and anti-monopolization measures have since tended to concentrate upon the control of mergers.

Less dramatic but equally important have been efforts to defend competition by monitoring and regulating business practices. The Justice Department has given particular attention to price-fixing, and has obtained price-fixing and bid-rigging convictions in the soft drink, motion picture, trash-hauling, road-building, electrical contracting and dozens of other industries involving hundreds of millions of dollars in commerce. And in recent years, grand juries throughout the country have been investigating possible violations with respect to fax machine paper, display materials, explosives, plumbing supplies, doors, aluminium extrusions, carpet, bread, and many more products and services. The Justice Department also has recently been investigating and prosecuting bid-rigging in connection with Defense Department and other government procurement.

The regulatory practices that are currently adopted by the Federal Trade Commission and the Department of Justice are described in the article on competition policy.