See Cost of Antitrust
The thrust of each of the four major U.S. antitrust laws is to limit market power or to prohibit undesirable business practices. All were enacted in response to perceived business abuses, beginning with allegations against Standard Oil and the railroads late in the last century. In response to strong political support for a constitutional amendment to outlaw monopolies, the Sherman Antitrust Act was enacted in 1890.
The two major provisions of the Sherman Antitrust Act (as subsequently revised) are:
Section 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 hereby declared to be illegal.
Section 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 . . . shall be deemed guilty of a felony . . . .
Both sections then go on to spell out penalties for violation of the law. The act stipulates that corporations may be fined up to $1 million; individuals may be fined up to $100,000, or they can be imprisoned for up to 3 years, or both, at the discretion of the court.
Section 2 has been especially hard to enforce. Identifying a specific market to prove "monopolization" requires scrutiny of both the market (geographic characteristics?) and the nature of the product (substitutability from the vantage points of both consumers and other potential producers). Once such questions are settled, the court must determine what constitutes a monopoly. Must a firm control 100 percent of a market to be guilty of monopolization? Should a 90 percent market share be illegal? 80 percent? 70 percent?
Section 2 also prohibits "attempts to monopolize." What conduct is intended to produce a monopoly? It seems strange from today's perspective, but early court cases often prosecuted union strikers as violators of the Sherman Act. These cases and other ambiguities in the Sherman Act led to passage of more specific antitrust laws.
The Clayton Act
The Sherman Act was amended by the Clayton Act in 1914, which spelled out particular offenses more precisely and introduced into law the phrase "where the effect [of various practices] may be to substantially lessen competition or tend to create a monopoly."
According to the Clayton Act:
Section 2: It shall be unlawful for any person engaged in commerce . . . to discriminate in price between different purchasers of commodities of like grade and quality . . . .
The courts have enumerated many specific standards for enforcement of the price discrimination section (Section 2). For example, price discrimination is permitted if a defendant can show that it does not reduce competition (e.g., discounts for students and senior citizens to movies and supersaver fares on airlines). Moreover, price discrimination is permitted for intangible properties or services (e.g., medical care), or where differences in costs (e.g., transportation), account for different prices.
The Federal Trade Commission Act
The Clayton Act was reinforced by the Federal Trade Commission (FTC) Act of 1914, which created a commission, the FTC, to investigate and challenge any "unfair methods of competition . . . , and unfair or deceptive acts or practices in or affecting commerce." The act did not define "unfair practices," leaving the interpretation of the statute and the determination of what practices are unfair or deceptive up to the FTC, subject to review by the courts. The courts have severely restricted the scope of the FTC. Curtailing business fraud and such deceptive practices as false and misleading advertising has been one area where it has been reasonably effective. The FTC's vigor in challenging perceived unfair business practices ebbs and flows with the political tides, but the FTC remains a watchdog guarding consumer interests.
Section 2 of the Clayton Act was amended by the Robinson-Patman Act in 1936 in the midst of the Great Depression. This act was designed to limit price discrimination in the form of special promotional allowances. Discounts were permitted only where justified by differences in costs or when introduced as "good faith" efforts to meet competition. Because quantity discounts have been attacked under the Robinson-Patman Act, many economists criticize the law as a protector of small firms from competition rather than a guarantor of competition. Huge differences exist between protecting competitors from failure and promoting competition. The basic contents of the four major acts are summarized in Table 3.
TABLE 3 MISSING!!! (Macro 12, -All 27)
The Sherman Antitrust Act made every "combination . . . in restraint of trade" illegal. As this act was interpreted by the courts, political pressures and economic realities arose that have virtually exempted several important groups from antitrust prosecution, including agricultural cooperatives, sports organizations, industry export associations, insurance companies, and labor unions, closely-regulated industries.
National policy favors the right of workers to unionize and bargain collectively. The Sherman Antitrust Act, however, was originally used to stifle union activity. Sections 6 and 20 of the Clayton Act largely exempted collective bargaining by workers from antitrust actions.
Curiously, the courts have almost totally exempted professional baseball and have provided specialized exemptions for other amateur and professional sports organizations from antitrust actions on the strange doctrine that they are not in interstate commerce because sporting events are "entertainment, not business." Thus, the NFL, NBA, NCAA, AAU, and a variety of other associations in our multibillion-dollar sports industry are reasonably free to collude against their employees, potentially competitive organizations, or each other. These exemptions are, however, increasingly under attack in the courts.
Normally, more tightly regulated is an industry, the greater is its exemption from antitrust laws. For example, public utilities and cable television monopolies are seldom challenged, because their rights to monopolize are recognized and their rate structures are regulated. Because regulatory agencies presumably express the public interest, exemption from antitrust laws seems sensible to allow the public to realize any gains from cooperation among regulated firms.