Congress passed the first antitrust law, the Sherman Act, in 1890 as a “comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade.” In 1914, Congress passed two additional antitrust laws: the Federal Trade Commission Act, which created the FTC, and the Clayton Act. With some revisions, these are the three core federal antitrust laws still in effect today.
The antitrust laws proscribe unlawful mergers and business practices in general terms, leaving courts to decide which ones are illegal based on the facts of each case. Courts have applied the antitrust laws to changing markets, from a time of horse and buggies to the present digital age. Yet for over 100 years, the antitrust laws have had the same basic objective: to protect the process of competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep prices down, and keep quality up.
Here is an overview of the three core federal antitrust laws.
The Sherman Act outlaws “every contract, combination, or conspiracy in restraint of trade,” and any “monopolization, attempted monopolization, or conspiracy or combination to monopolize.” Long ago, the Supreme Court decided that the Sherman Act does not prohibit every restraint of trade, only those that are unreasonable. For instance, in some sense, an agreement between two individuals to form a partnership restrains trade, but may not do so unreasonably, and thus may be lawful under the antitrust laws. On the other hand, certain acts are considered so harmful to competition that they are almost always illegal. These include plain arrangements among competing individuals or businesses to fix prices, divide markets, or rig bids. These acts are “per se” violations of the Sherman Act; in other words, no defense or justification is allowed.
The penalties for violating the Sherman Act can be severe. Although most enforcement actions are civil, the Sherman Act is also a criminal law, and individuals and businesses that violate it may be prosecuted by the Department of Justice. Criminal prosecutions are typically limited to intentional and clear violations such as when competitors fix prices or rig bids. The Sherman Act imposes criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million.
The Federal Trade Commission Act bans “unfair methods of competition” and “unfair or deceptive acts or practices.” The Supreme Court has said that all violations of the Sherman Act also violate the FTC Act. Thus, although the FTC does not technically enforce the Sherman Act, it can bring cases under the FTC Act against the same kinds of activities that violate the Sherman Act. The FTC Act also reaches other practices that harm competition, but that may not fit neatly into categories of conduct formally prohibited by the Sherman Act. Only the FTC brings cases under the FTC Act.
The Clayton Act addresses specific practices that the Sherman Act does not clearly prohibit, such as mergers and interlocking directorates (that is, the same person making business decisions for competing companies). Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.” As amended by the Robinson-Patman Act of 1936, the Clayton Act also bans certain discriminatory prices, services, and allowances in dealings between merchants. The Clayton Act was amended again in 1976 by the Hart-Scott-Rodino Antitrust Improvements Act to require companies planning large mergers or acquisitions to notify the government of their plans in advance. The Clayton Act also authorizes private parties to sue for triple damages when they have been harmed by conduct that violates either the Sherman or Clayton Act and to obtain a court order prohibiting the anticompetitive practice in the future.
In addition to these federal statutes, most states have antitrust laws that are enforced by state attorneys general or private plaintiffs. Many of these statutes are based on the federal antitrust laws.
Free and open markets are the foundation of a vibrant economy. Aggressive competition among sellers in an open marketplace gives consumers — both individuals and businesses — the benefits of lower prices, higher quality products and services, more choices, and greater innovation. The FTC’s competition mission is to enforce the rules of the competitive marketplace — the antitrust laws. These laws promote vigorous competition and protect consumers from anticompetitive mergers and business practices. The FTC’s Bureau of Competition, working in tandem with the Bureau of Economics, enforces the antitrust laws for the benefit of consumers.
What if there were only one grocery store in your community? What if you could buy a phone from only one retailer? What if only one dealer in your area sold cars?
Without competition, the grocer may have no incentive to lower prices. The phone shop may have no reason to offer a range of choices. The car dealer may have no motivation to keep its showroom open at convenient hours or offer competitive financing.
Competition in America is about price, selection, and service. It benefits consumers by keeping prices low and the quality and choice of goods and services high. Competition also encourages businesses to offer new and better products.
Competition makes our economy work. By enforcing antitrust laws, the Federal Trade Commission helps to ensure that our markets are open and free. The FTC promotes free and open competition and challenges anticompetitive business practices to make sure that consumers have access to quality goods and services at competitive prices, and that businesses can compete on the merits of their work. The FTC does not choose winners and losers – you, as the consumer, do that. Rather, their job is to make sure that businesses are competing fairly within a set
Through its Bureaus of Competition and Economics, the FTC puts its antitrust resources to work, especially where consumer interest and spending are high: in matters affecting energy, health care, food, pharmaceuticals, professional services, computer technology and databases, medical devices, and funeral services.
WHAT IS ANTITRUST?
The word “antitrust” dates from the late 1800s, when powerful companies dominated industries, working together as “trusts” to stifle competition. Thus, laws aimed at protecting competition have long been labeled “antitrust.” Fast forward to the 21st century: you hear “antitrust” in news stories about competitors merging or companies conspiring to reduce competition.
The FTC enforces antitrust laws by challenging business practices that could hurt consumers by resulting in higher prices, lower quality, or
fewer goods or services. They monitor business practices, review potential mergers, and challenge them when appropriate to ensure that the market works according to consumer preferences, not illegal practices.
What kinds of business practices interest the Bureau of Competition? In short, the very practices that affect consumers the most: mergers, agreements among competitors, restrictive agreements between manufacturers and product dealers, and attempts by monopolists to thwart new competitors. The FTC reviews these and other practices, looking at the likely effects on consumers and competition. We ask: Would they lead to higher prices, inferior service, or fewer choices for consumers? Would they make it more difficult for other companies to enter the market?
Many mergers benefit consumers by allowing firms to operate more efficiently. Other mergers, however, may result in higher prices, fewer choices, or lesser quality. The challenge for the FTC is to analyze the likely effects of a merger on consumers and competition – a process that can take thousands of hours of investigation and economic analysis. In one FTC case, a major baby food maker wanted to buy one of its two competitors. Based on evidence that the merger would lead to higher prices for consumers, the FTC went to court and successfully blocked the deal.
Agreements Among Competitors
It’s illegal for business rivals to act together in ways that can limit competition, lead to higher prices, or hinder other businesses from entering the market. In one FTC case, a group of auto dealers threatened to stop advertising in a newspaper if it printed money-saving tips for car shoppers. The FTC challenged the dealers because it is illegal for businesses to act together in ways that can deprive consumers of important information about products they want to buy.
Agreements among business rivals about price or price-related matters like credit terms are among the most serious business practices the FTC considers. That’s because price is usually the principal basis for competition and consumer choice. Price fixing – companies getting together to set prices – is illegal. But that does not mean that all price similarities, or price changes that occur about the same time, are the result of price fixing. On the contrary, they often result from normal market conditions. For example, prices of commodities such as wheat are often identical because the products are virtually identical, and the prices that farmers charge all rise and fall together without any agreement among them. If a drought causes the supply of wheat to decline, the price to all affected farmers will increase. Uniformly high prices for a product in limited supply also can result from an increase in consumer demand: Just ask any shopper hunting for a “must have” children’s toy.
Agreements Between Manufacturers and Product Dealers
Many “package deals” create efficiencies that are beneficial to consumers: for example, automobile dealers sell tires with their cars because it makes sense. You might prefer a different kind of tire, but shipping and selling cars without tires is not practical. On the other hand, some “tie-in” agreements are illegal because they restrict competition without providing benefits to consumers. For example, the antitrust laws likely would not permit a drug manufacturer to require customers to buy a patient monitoring system they don’t want along with the prescription drugs they do want.
A monopoly exists when one company controls a product or service in a market. If a company gains a monopoly because it offers consumers a better product at a better price, that’s not against the law. But if it creates or maintains a monopoly by unreasonably excluding other companies, or by impairing other companies’ ability to compete against them, that conduct raises antitrust concerns. For example, a newspaper with a monopoly in a small town could not refuse to run advertisements from businesses that also advertised on a local television station.
Other Anticompetitive Conduct
Business strategies that reduce competition may be illegal if they lack a reasonable business justification. For example, a pharmaceutical company’s exclusive contracts with suppliers of a key ingredient kept generic drug makers from getting that ingredient. Without competition from generics, the pharmaceutical company was able to raise prices 3,000 percent: a $5 prescription would have cost consumers $150. The FTC, 32 states, and the District of Columbia challenged the contracts, which resulted in a $100 million court settlement for injured consumers.
KEEPING MARKETS COMPETITIVE
By challenging anticompetitive business practices, the FTC helps to ensure that consumers have choices in price, selection, and service. To learn about competition problems, the FTC often receives information from consumers like you. If you suspect illegal behavior, please notify the FTC or your state’s Attorney General.