Antitrust

Antitrust law concerns the limits placed by governments on the unrestricted operation of corporations, usually intended to prevent the abuse of market power by companies. "Antitrust" is the usual term in the United States from the 1880s; in Europe and elsewhere it is called competition policy.

The United States was the first country to develop an effective antitrust regime. As Freyer (2006) shows, before 1945 the United States stood alone in its enthusiasm for antitrust. Britain and Nazi Germany, for example, endorsed cartels and other schemes to eliminate competition and stabilize markets. The American occupation forces introduced antitrust into Japanese policy. Elsewhere the Americans actively proselytized antitrust and provided technical assistance for those who wanted it.

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 monopolise any part of trade or commerce.

Supreme Court interpretations of that legislation 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 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 offences 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 behaviour could be judged by their effect rather than solely by their form.

Antitrust Law

The Sherman Act of 1908 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 offences.

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 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 further change was introduced in 1977 with the ruling that the resulting gains in efficiency were admissible as a defence of some vertical restraints. Further changes have in effect been introduced by guidelines issued by the Federal Trade Commission and the Department of Justice.

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 collossus. 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 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 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 adminstration 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. Microfsoft won on appeal and was not split up. Meanwhile the European Union attacked Microsoft's monopoly in its own courts, and in September 2007 the European Court of First Instance ruled that Microsoft had abused its market power by adding a digital media player to Windows, undercutting the early leader, Real Networks. The court ordered Microsoft to obey a March 2004 EU order to share confidential computer code with competitors, and imposed a record fine of 497 million euros ($690 million dollars).

Exceptions from Antitrust Regulation

Exceptions exist to the antitrust regimes, most notably regarding patents and copyrights. Each of these doctrines give the owner a legal monopoly over the invention or the work of authorship at issue. Furthermore, because the owner of a patent has the legal right to monopolize the invention to which the patent applies, it may also license the invention to competitors and control the prices that those competitors charge. Another legal form of anticompetitive conduct is state action, as a government may legally choose to monopolize a particular product, or to permit private actors to monopolize that product. Finally, use of the legal system in a way that harms competitors is legal, so long as the legal claims are brought for the legitimate vindication of rights, rather than as a mere tool of harassment.

SEE ALSO

• Competition policy
• EU competition policy

Bibliography

United States

• Areeda, Phillip and Louis Kaplow. Antitrust Analysis: Problems, Texts, Cases (1997)
• Baker, Jonathan B. "The Case for Antitrust Enforcement," The Journal of Economic Perspectives Vol. 17, No. 4 (Autumn, 2003), pp. 27-50 in JSTOR
• Crandall, Robert W., and Clifford Winston. "Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence," The Journal of Economic Perspectives> Vol. 17, No. 4 (Autumn, 2003), pp. 3-26 in JSTOR
• Freyer, Tony. Regulating Big Business: Antitrust in Great Britain and America, 1880-1990 (1992)
• Freyer, Tony A. Antitrust and Global Capitalism, 1930–2004. 2006. 450 pp. ISBN 978-0-521-81788-2
• Hofstadter, Richard. The Paranoid Style in American Politics and Other Essays (1965), essay on history of antitrust ideas
• Hylton, Keith N. Antitrust Law: Economic Theory and Common Law Evolution (2003)
• Kaysen, Carl, and Donald F. Turner. Antitrust Policy an Economic and Legal Analysis (1971) online edition
• Letwin, William. Law and Economic Policy in America: The Evolution of the Sherman Antitrust Act (1965)
• Miscamble, Wilson D. "Thurman Arnold Goes to Washington: A Look at Antitrust Policy in the Later New Deal," The Business History Review Vol. 56, No. 1 (Spring, 1982), pp. 1-15 in JSTOR
• Peritz, Rudolph J. R. "Three Visions of Managed Competition, 1920-1950," Antitrust Bulletin, Spring 1994 39 #1 273-287.
• Posner, Richard A. Antitrust Law (2nd ed. 2001)
• Sklar, Martin J. The Corporate Reconstruction of American Capitalism, 1890-1916: The Market, the Law, and Politics (1988)
• Stelzer, Irwin M. Selected Antitrust Cases: Landmark Decisions in Federal Antitrust (1961) online edition
• Sullivan, E. Thomas. The Political Economy of the Sherman Act: The First One Hundred Years (1991) online edition
• Thorelli, Hans. The Federal Antitrust Policy: The Federal Antitrust Policy: Origination of an American Tradition (1954)
• Williamson, James R. Federal Antitrust Policy during the Kennedy-Johnson Years 1995. 188 pgs. online edition

Europe

• Chapman, Dudley H., and Barry E. Hawk. Molting Time for Antitrust: Market Realities, Economic Fallacies, and European Innovations (1991) online edition
• Freyer, Tony. Regulating Big Business: Antitrust in Great Britain and America, 1880-1990 (1992)
• Freyer, Tony A. Antitrust and Global Capitalism, 1930–2004. 2006. 450 pp. ISBN 978-0-521-81788-2, explores the development of antitrust law in Australia, Japan, Germany, Poland, and the European Union (EU)
• Jones, Clifford A. Private Enforcement of Antitrust Law in the EU, UK, and USA (1999) online edition
• Sauter, Wolf. Competition Law and Industrial Policy in the EU (1997) 262 pgs. online edition

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