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.

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, or the products of its competitors less attractive. 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. On the other hand a firm might selectively lower prices to prevent a competitor for gaining market share (or even give away free the equivalent of a competitor's product), or give secret rebates to undercut a competitor's sales, or punish customers who do business with the competition.

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 specifically pointed to the dangers of "rent seeking" as a corruption to be vigilantly opposed.

The History of Antitrust law

English law

One of the earliest significant antitrust cases was that of Darcy v. Allein [The Case of Monopolies], 77 Eng. Rep. 1260 (K.B. 1603), in which a court of England voided a grant by Queen Elizabeth 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. An earlier case reports an action by Parliament resulting in the brief imprisonment John Pecche for the purported abuse of "a patent giving him the exclusive right to sell sweet wines at retail in London." 50 Edw. III, No. 33 (1376).

The Darcy court referenced even earlier prohibitions against monopolization, writing (in Latin, translated by Edward Coke):

For we read in Justinian that monopolies are not to be meddled with, because they do not conduce to the benefit of the common weal but to its ruin and damage. The civil Laws forbid monopolies: in the chapter of monopolies, one and the same Law. The Emperor Zeno ordained that those practicing monopolies should be deprived of all their goods. Zeno added that even imperial [p]rescripts were not to be accepted if they granted monopolies to anyone.

England enacted a statutory prohibition on monopolies in 1624, "An Act Concerning Monopolies and Dispensations of Penal Laws and the Forfeitures Thereof" [Statute of Monopolies], 1624, 21 Jam., ch. 3 (Eng.). U.S. states enacted individual prohibitions against monopolies as early as 1814, with the General Laws of the Colony and Province of Massachusetts Bay 170 (1814) 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".

Contemporary Antitrust Laws

Most countries have enacted a collection of laws designed to punish anti-competitive conduct conduct, particularly conduct that is seen to burden consumers with artificially high prices, prevent increases in the quality of goods, prevent useful innovations, and artificially induce the failure of competing businesses.

Certain specific behaviors have been identified as evidencing an intent to quell competition. These include monopolizing (attempting to acquire competitors, and thereby become the only player in the market); price fixing (agreements between competitors that set prices in the same way a monopolist would); predatory pricing (reducing prices below the cost of production long enough to drive competitors out of the marketplace, and then recouping those losses with artificially high prices); group boycotts (agreements between competitors to boycott particular suppliers of materials in order to promote a competing supplier); and tying arrangements (allowing consumers to purchase a non-competitive product only if they also agree to purchase a competitive product).

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).

The Sherman Act

The United States enacted one of the most significant pieces of antitrust legislation in 1890, with the passage of the Sherman Antitrust Act (Sherman Act, 1890, ch. 647, Template:USStat, Template:Usc). This was the first United States federal government action to limit monopolies, and is the oldest of all U.S. antitrust laws.

The Sherman Act provides:

1. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.
2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony [. . . ]"

The Act put responsibility upon government attorneys and district courts to pursue and investigate trusts, companies and organizations suspected of violating the Act. Although not used in court cases for some years, Theodore Roosevelt used the Act extensively in his antitrust campaign, managing to divide the Northern Securities Company. It was further used by President Taft to break up the American Tobacco Company, which had a monopoly over the sale of tobacco in the United States.

Later amendments to the Sherman Act addressed particular anticompetitive practices such as predatory pricing in greater detail, and established both hightened penalties for infractions and exceptions to its scope.

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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