Antitrust laws, also referred to as "competition laws," are statutes developed by the U.S. Government to protect consumers from predatory business practices by ensuring that fair competition exists in an open-market economy. These laws have evolved along with the market, vigilantly guarding against would-be monopolies and disruptions to the productive ebb and flow of competition.
Antitrust laws are applied to a wide range of questionable business activities, including but not limited to:
Market Allocation
Suppose my company operates in the Northeast and your company does business in the Southwest. If you agree to stay out of my territory, I won't enter yours, and because the costs of doing business are so high that startups have no chance of competing, we both have a de facto monopoly.
In 2000, the Federal Trade Commission found FMC Corp. (FMC) guilty of colluding with Asahi Chemical Industry to divide the market for micro-crystalline cellulose, a primary binder in pharmaceutical tablets. The Commission barred FMC from distributing micro-crystalline cellulose to any competitors for 10 years in the United States, and also banned the company from distributing any Asahi products for five years.
Bid Rigging
There are three companies in an industry, and all three decide to quietly operate as a cartel. Company 1 will win the current auction, so long as it allows Company 2 to win the next and Company 3 to win thereafter. Each company plays this game so that all retain current market share and price, thereby preventing competition.
Bid rigging can be further divided into the following forms: bid suppression, complimentary bidding and bid rotation.
- Bid Suppression: Competitors refrain from bidding or withdraw a bid so that a designated winner’s bid is accepted.
- Complementary Bidding: Also known as cover or courtesy bidding, complementary bidding happens when competitors collude to submit unacceptably high bids for the buyer, or include special provisions in the bid that effectively nullify the bids. Complementary bids are the most frequent of bid rigging schemes, and are designed to defraud purchasers by creating the illusion of a genuine competitive bidding environment.
- Bid Rotation: In bid rotations, competitors take turns being the lowest bidder on a variety of contract specifications, such as, contract sizes and volumes. Strict bid rotation patterns violate the law of chance, and signal the presence of collusion activity.
Price Fixing
My company and your company are the only two companies in our industry, and our products are so similar that the consumer is indifferent between the two except for price. In order to avoid a price war, we sell our products at the same price to maintain margin, resulting in higher costs than the consumer would otherwise pay.
For example, Apple Inc. (AAPL) lost an appeal regarding a 2013 U.S. Department of Justice ruling that found the tech titan guilty of fixing the prices of eBooks. Apple was found liable to pay $450 million in damages.
Monopolies
Usually when most hear the term "antitrust" they think of monopolies. One of the most well-known antitrust cases in recent memory involved Microsoft Corporation (MSFT) being found guilty of anti-competitive, monopolizing actions, by forcing its own web browsers upon computers that had installed the Windows operating system.
Regulators must also ensure that monopolies are not borne out of a naturally competitive environment and gained market share simply through business acumen and innovation. It’s only acquiring market share through exclusionary or predatory practices that is illegal.
Below are a few types of monopolistic behavior that can be grounds for legal action:
- Exclusive Supply Agreements: These occur when a supplier is prevented from selling to different buyers. This stifles competition against the monopolist as the company will be able to buy supplies at potentially lower costs and prevent competitors from manufacturing similar products.
- Tying the Sale of Two Products: When a monopolist has dominance in the market shares of one product, but wishes to gain market shares in another product, it can tie sales of the dominant product to the second product. This forces customers for the second product to buy something they may not need or want and is a violation of antitrust laws.
- Predatory Pricing: Often hard to prove, and requiring careful examination on the part of the Federal Trade Commission, predatory pricing can be considered monopolistic if the price cutting firm can cut prices far into the future and has enough market share to recoup its losses down the line.
- Refusal to Deal: Like any other company, monopolies can choose who they wish to conduct business with. However, if they use their market dominance to prevent competition, this can be considered a violation of antitrust laws.
Mergers and Acquisitions
No introduction to antitrust legislation would be complete without addressing mergers and acquisitions. We can divide these into horizontal, vertical and potential competition mergers.
Horizontal Mergers. When firms with dominant market shares prepare to enter a merger, the Federal Trade Commission must decide whether the new entity will be able to exert monopolistic and anti-competitive pressures on the remaining firms. For example, the company that makes Malibu Rum and had an 8 percent market share of total rum sales, proposed buying the company that makes Captain Morgan’s rums, which had a 33 percent of total sales to form a new company holding 41 percent market share.
Meanwhile, the incumbent dominant firm held over 54 percent of sales. This would mean that the premium rum market would be composed of two competitors together responsible for over 95 percent of sales in total. The Federal Trade Commission challenged the merger on the grounds that the two remaining companies could collude to raise prices and forced Malibu to divest its rum business.
Unilateral Effects. The Federal Trade Commission will often challenge mergers between rival firms that offer close substitutes, on the grounds that the merger will eliminate beneficial competition and innovation. In 2004, the Federal Trade Commission did just that, by challenging a merger between General Electric (GE) and a rival firm, as the rival firm manufactured competitive non-destructive testing equipment. In order to go forward with the merger, GE agreed to divest its non-destructive testing equipment business.
Vertical Mergers. Mergers between buyers and sellers can improve cost savings and business synergies, which can translate to competitive prices for consumers. But when the vertical merger can have a negative effect on competition due to a competitor’s inability to access supplies, the Federal Trade Commission may require certain provisions prior to the completion of the merger. For example, Valero Energy Corp. (VLO) had to divest certain businesses and form an informational firewall when it acquired an ethanol terminator operator.
Potential Competition Mergers. Over the years, the Federal Trade Commission has had to challenge rampant preemptive merger activity in the pharmaceutical industry between dominant firms and would-be or new market entrants to facilitate competition and entry into the industry.
The Big Three Antitrust Laws
Let’s take brief look at the main antitrust laws in the United States. The core of U.S. antitrust legislation was created by three pieces of legislation: the Sherman Act of 1890, the Federal Trade Commission Act (which also created the Federal Trade Commission), and the Clayton Act.
- The Sherman Act intended to prevent unreasonable "contract, combination or conspiracy in restraint of trade," and "monopolization, attempted monopolization, or conspiracy or combination to monopolize." Violations against the Sherman Act can have severe consequences, with fines up to $100 million for corporations and $1 million for individuals, as well as prison terms up to 10 years.
- The Federal Trade Commission Act bans "unfair methods of competition" and "unfair or deceptive acts or practices." According to the Supreme Court, violations of the Sherman Act also violate the Federal Trade Commission Act. Therefore, even though the Federal Trade Commission cannot technically enforce the Sherman Act, it can bring cases under the FTC Act against violations of the Sherman Act.
- The Clayton Act addresses specific practices that the Sherman Act may not address. According to the FTC, these include preventing mergers and acquisitions that may "substantially lessen competition or tend to create a monopoly," preventing discriminatory prices, services and allowances in dealings between merchants, requiring large firms to notify the government of possible mergers and acquisitions, and imbuing private parties with the right to sue for triple damages when they have been harmed by conduct that violates the Sherman and Clayton Acts, as well as allowing the victims to obtain court orders to prohibit further future transgressions.
The Bottom Line
At their core, antitrust provisions are designed to maximize consumer welfare. Supporters of the Sherman Act, the Federal Trade Commission Act and the Clayton Act will argue that since their inception, these antitrust laws have protected the consumer and competitors against market manipulation stemming from corporate greed. Through both civil and criminal enforcement, antitrust laws seek to stop price and bid rigging, monopolization, and anti-competitive mergers and acquisitions. (For more on this, read "Antitrust Defined.")
The Antitrust Laws
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.
Guide to 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.
The Bureau of Competition has developed a variety of resources to help explain its work. For an overview of the types of matters investigated by the Bureau, read Competition Counts. This Guide to the Antitrust Laws contains a more in-depth discussion of competition issues for those with specific questions about the antitrust laws. From the menu on the left, you will find Fact Sheets on a variety of competition topics, with examples of cases and Frequently Asked Questions. Within each topic you will find links to more detailed guidance materials developed by the FTC and the U.S. Department of Justice.
For additional information about the work of the Bureau, or to report a suspected antitrust violation, contact us. To learn more about how the Bureau is organized and who to contact with a competition question, consult Inside BC. The Commission cannot represent individuals or businesses, and these resources are not intended to substitute for legal advice.
Dealings with Competitors
In order to compete in modern markets, competitors sometimes need to collaborate. Competitive forces are driving firms toward complex collaborations to achieve goals such as expanding into foreign markets, funding expensive innovation efforts, and lowering production and other costs.
In today's marketplace, competitors interact in many ways, through trade associations, professional groups, joint ventures, standard-setting organizations, and other industry groups. Such dealings often are not only competitively benign but procompetitive. But there are antitrust risks when competitors interact to such a degree that they are no longer acting independently, or when collaborating gives competitors the ability to wield market power together.
For the most blatant agreements not to compete, such as price fixing, big rigging, and market division, the rules are clear. The courts decided many years ago that these practices are so inherently harmful to consumers that they are always illegal, so-called per se violations. For other dealings among competitors, the rules are not as clear-cut and often require fact-intensive inquiry into the purpose and effect of the collaboration, including any business justifications. Enforcers must ask: what is the purpose and effect of dealings among competitors? Do they restrict competition or promote efficiency?
These Fact Sheets provide more detail about the types of dealings with competitors that may result in an antitrust investigation. For further guidance, read Antitrust Guidelines for Collaborations Among Competitors.
Single Firm Conduct
Some companies succeed in the marketplace to the point where their behavior may not be subject to common competitive pressures. This is not a concern for most businesses, as most markets in the U.S. support many competing firms, and the competitive give-and-take prevents any single firm from having undue influence on the workings of the market.
Section 2 of the Sherman Act makes it unlawful for a company to "monopolize, or attempt to monopolize," trade or commerce. As that law has been interpreted, it is not illegal for a company to have a monopoly, to charge "high prices," or to try to achieve a monopoly position by what might be viewed by some as particularly aggressive methods. The law is violated only if the company tries to maintain or acquire a monopoly through unreasonable methods. For the courts, a key factor in determining what is unreasonable is whether the practice has a legitimate business justification.
These Fact Sheets discuss antitrust rules that courts have developed to deal with the actions of a single firm that has market power.
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