The History of Anti-trust Legislation
Anti-trust laws are meant to promote competition and limit monopoly forming. Listed below are the main anti-trust legislation acts passed in the United States. Other industrialized countries have similar laws.
1. The Sherman Act of 1890.
The Sherman Act was the first important anti-trust (anti-monopoly) law passed in the United States. This act outlaws all contracts, combinations, and conspiracies that unreasonably restrain interstate and foreign trade. If two or more companies sign a contract to fix prices, rig bids, or allocate consumers, they are in violation of the Sherman Act. Individuals can be fined up to $350,000 (and up to ten years in prison) and corporations can be fined up to $10 million for each offense.
2. The Clayton Act of 1914.
The Clayton Act expanded on the Sherman Act and more clearly defined anti-competitive practices. Specifically, the Clayton Act prohibits the following:
1. Price discrimination, local price cutting and price fixing, if it leads to monopoly-forming. Price discrimination is when a firm charges different prices to different buyers. Some price discrimination is legal; for example, when a movie theater sells tickets at a discount to senior citizens. It is not legal to price discriminate on the basis of race, gender, ethnicity, etc. It is also not legal if a firm charges a different price to different companies unless justified by different costs (transportation, volume discounts). Local price cutting is done by a large firm in a local market to drive out small, local competitors. Price fixing is when two or more companies agree on a price (usually a higher price) in order to increase their profits.
2. Mergers and acquisitions that lead to monopoly-forming. Mergers occur when two or more companies combine their resources to form one company. Acquisitions are purchases of companies or parts of companies by usually a larger company.
3. A person from being a director of two or more competing corporations.
4. Exclusives dealing arrangements, if these arrangements lead to monopoly-forming. Microsoft was accused of an exclusive dealing arrangement when it required purchasers of its Windows operating systems also to include its Internet Explorer browser. Microsoft was also accused of including code in its Windows system, which made it difficult for competing software providers to run software inside of Windows. Google was accused of placing companies it owns at the top of its search findings. This was deemed to be anti-competitive.
In addition, as part of the Clayton Act, labor unions were declared legal, as were strikes, picketing, boycotts, and agricultural cooperatives.
3. The Federal Trade Commission Act of 1914.
The Federal Trade Commission Act established the Federal Trade Commission, which is a bipartisan body of five members appointed by the President of the United States to serve seven-year terms. This commission, along with the Anti-trust Division of the Department of Justice, enforces anti-trust laws. The main purpose of the Federal Trade Commission is to preserve competition and protect consumers.
Critiques of Anti-trust Laws
The mere size of a monopoly makes some people suspicious that the company obtained its position in an illegal and unethical way, or that the company will use its size to harm consumers. This does happen. However, this is not always the case and it is questionable whether we should criticize firms because of size alone. Milton Friedman initially agreed with the intent of the anti-trust laws, but eventually came to the conclusion that they do more harm than good.
If a company achieves its status through efficiency and innovation, then its services, low cost, and low prices can be beneficial for society and our economy. Former Fed Chair Alan Greenspan supports monopolies, as long as they are not coercive monopolies.
If monopolies are indeed coercive or take advantage of their size by behaving in unethical, illegal, or economically harmful ways, it is, of course, proper to take them to court and fine them if proven guilty. One can argue that even without courts, if consumers find out that a monopoly company is abusing its powers, many consumers will stop purchasing its products and the monopoly will lose its powers.
Large companies in the financial services industry have come under attack recently because several are considered “too big to fail” and the government felt compelled to bail them out in order to avoid a panic in the domestic and world economy. If the failure of a large company causes a panic, then should we not allow these firms to grow to this size? Or should we let them fail, even at the expense of a temporary panic, and find comfort in the idea that once a company fails, surviving companies will grow stronger and new firms will emerge?