The "Rule of Reason"

In two early cases involving Standard Oil and the American Tobacco Company, the Supreme Court ruled that trusts (monopolies) could either be "good" or "bad" and suggested that the Sherman Act only outlaws "bad" restraints on trade.

 

The rule of reason approach attempted to distinguish good trusts from bad trusts, using such criteria as whether they set their prices to yield supernormal profits, or attempted to run competitors out of business.

Both Standard Oil and American Tobacco were judged "bad" trusts and were subjected to divestiture---they were split into several firms.

 

            Certain anticompetitive practices (refusals to deal and tie-in sales) were permitted if a firm proved that its conduct fit logically with other practices permitted by law. Whether a practice was held to be "reasonable" depended on such things as the percentage of the market affected, expected duration of the practice, and the relative strengths of the parties involved.

 

The Per Se Doctrine

In the 1945 case of U.S. v. Aluminum Co. of America (Alcoa), the Supreme Court applied the per se doctrine to interpret antitrust laws. The Court reasoned that the Sherman Act does not condone "good" trusts and forbid "bad" trusts; it prohibits all monopolization and restraints on trade. Whether a firm abused its power or obtained its monopoly by reasonable methods was irrelevant. The existence of monopoly was sufficient. In this case, Alcoa was forced to sell some assets to other producers to enhance competition in the aluminum industry.

The per se doctrine asserts that certain contracts or combinations seem inherently so contrary to competition that they are illegal per se.

 

The government needs only to show that such agreements were reached; whether competition has been harmed is immaterial. Per se violations include: (a) price-fixing agreements, (b) schemes to split customers into territories, (c) agreements between competitors to refuse to deal with certain suppliers or customers, and (d ) "tie-in sales," where a dominant seller forces a buyer to purchase peripheral products in order to purchase the desired good.

 

            After the per se approach was adopted, the courts also began trying to address what constitutes a monopoly by looking at such factors as the number, size, and strength of the firms in the market, the nature of the technology, and any economies of scale.