Antitrust legislation

Antitrust regulation had a dampening effect on the growth of big business by dismantling monopolistic companies, reducing predatory behaviors such as price fixing, and restricting mergers.

The federal government’s Sherman Antitrust Act of 1890Sherman Antitrust Act of 1890 initiated federal antitrust policy and remained a legislative centerpiece for the following century. The law was a response to widespread public distress over the rise of big business and the alleged predatory conduct of railroad corporations and John D. Rockefeller’s Standard Oil Company. In 1889-1891, eighteen individual states also adopted antitrust laws.Laws;antitrust

Sherman Antitrust Act

The Sherman Antitrust Act was relatively simple. It prohibited any contract, combination, or conspiracy in restraint of trade, as well as monopolization or attempts to monopolize. The law authorized the United States attorney general to prosecute violations or to bring civil suits against violators, seeking relief. In addition, private persons claiming injury could sue alleged violators and recover triple the amount of proven damages.

The provisions were vague and were gradually given detail by court cases. Loose combinations of several firms were frequently convicted for agreeing to fix prices, allocate markets, or agree on other elements of competitive behavior. Early cases involved railroads (Trans-Missouri Freight Association, 1897) as well as industrial firms (Addyston Pipe and Steel Company, 1899). The form of anticompetitive agreement was sufficient to constitute illegal behavior, regardless of whether the results significantly harmed others. This contract component remained consistent throughout antitrust history.

The provision against monopolization was not very effective. One of the greatest waves of corporate mergers occurred after 1890, culminating in the formation of the United States Steel Corporation in 1901. The presidency of Theodore Roosevelt saw a few actions against giant monopolies. In 1904, the first trust-busting episode involved the dissolution of Northern Securities Company, a giant railroad holding company. In 1911, successful prosecutions were brought against Standard Oil and American Tobacco. Both had been formed by extensive mergers. Each was broken up into several separate companies.

During the presidency of Woodrow Wilson, antitrust legislation was significantly extended by two related measures. The Clayton Antitrust Act of 1914Clayton Antitrust Act of 1914 forbade a number of specific business practices, including price discrimination, tying contracts and exclusive-deal agreements, purchases of corporation stock by other corporations, and interlocking directorships. Price discrimination involved large corporations charging lower prices in areas where they faced significant competitors and charging higher prices in areas where competition was lacking. The practice of tying required a customer to buy a second product to get the one they wanted (often a patented product). However, these actions were judged to be illegal only if they tended to lessen competition or to create a monopoly, and these conditions were difficult to establish.

The Federal Trade Commission Act of 1914Federal Trade Commission (FTC) Act of 1914 established a specialized agency to enforce the Clayton Act and also outlawed “unfair methods of competition” in general. The authorities maintained effective restraint on collusive behavior, as evidenced by United States v. Trenton Potteries (1927). However, antitrust prosecutions against such giant firms as United States Steel (1920) and International Harvester (1927) were not upheld in court.

The Great Depression

Policy changed dramatically with the onset of the Great Depression in 1929. The National Industrial Recovery Act of 1933National Industrial Recovery Act (NRA) of 1933 was predicated on the false theory that the depression resulted from overproduction and excessive competition. Businesses were encouraged to join together to create and enforce “codes of fair competition,” which frequently were collusive agreements to reduce competition. When approved by the government, such codes were exempt from antitrust.

The NRA was declared unconstitutional in 1935; however, elements of it were reenacted to protect such sectors as coal mining, airlines, petroleum extraction, and truck transport against “destructive” competition. Antipathy toward competition also helped motivate the Robinson-Patman Act of 1936Robinson-Patman Act of 1936, which enlarged the scope of prohibited price discrimination. The new law aimed to protect small retailers against the ability of large chain-store retailers to extract price concessions from suppliers. Antimonopoly and procompetition attitudes were strengthened by the prosperity and inflation of the 1940’s. Successful cases were brought against the giant Aluminum Company of America (1945) and against the major cigarette manufacturers in 1946.

The relatively ineffective restrictions on corporate mergers in the Clayton Act were greatly strengthened by the Celler-Kefauver Act of 1950Celler-Kefauver Act of 1950. This act was extended by the Hart-Scott-Rodino Act of 1976Hart-Scott-Rodino Act of 1976, which required firms contemplating mergers to file prior notification, giving the government authorities the capacity to negotiate as well as forbid.

Two noteworthy big-business prosecutions ended in 1982. The government’s case against International Business Machines (IBM) was withdrawn after being in the works from 1969. American Telephone and Telegraph Company (AT&T) accepted a consent decree to separate into a number of component companies. Both industries were subject to rapid technological change. IBM soon lost its dominant position in computers to firms such as Microsoft and Hewlett-Packard. The AT&T settlement, along with deregulation of rates, significantly opened the way for the rise of new telecommunications firms such as Sprint and the ill-fated WorldCom.

Other countries began to imitate U.S. antitrust measures, beginning with the forced breakup of cartels in Japan and Germany after World War II. Globalization greatly reduced the capacity for industrial firms to maintain monopoly positions, and the World Trade Organization and the European Union restrained the capacity of governments to aid their favored local monopolies.

American antitrust policy has always generated controversy among economists. Its biggest benefits have come from reducing collusion and preventing large firms from unfairly using their power to prevent the rise of competitors.

Further Reading

  • Armentano, Dominick T. Antitrust Policy: The Case for Repeal. 2d ed. Auburn, Ala.: Mises Institute, 1998. Argues that antitrust policies often restrict competition and interfere with business efficiency.
  • Hovenkamp, Herbert. Federal Antitrust Policy: The Law of Competition and Its Practice. 3d ed. St. Paul, Minn.: Thomas/West, 2005. An examination of antitrust law and the cases involved.
  • Kovacic, William E., and Carl Shapiro. “Antitrust Policy: A Century of Economic and Legal Thinking.” Journal of Economic Perspectives 14, no. 1 (Winter, 2000): 43-60. Analyzes the importance of judicial rulings and economic analysis in the evolution of antitrust.
  • Kovaleff, Theodore P., ed. The Antitrust Impulse. Armonk, N.Y.: M. E. Sharpe, 1994. Numerous essays express divergent views: Part 3 showcases both critics and defenders of antitrust law.
  • Peritz, Rudolph J., Jr. Competition Policy in America, 1888-1992: History, Rhetoric, Law. New York: Oxford University Press, 1996. History of federal government policies relating to antitrust issues. Includes a substantial bibliography and an index.
  • Reed, O. Lee. The Legal and Regulatory Environment of Business. 14th ed. New York:McGraw-Hill/Irwin, 2008. Lengthy work covers antitrust legislation in detail, examining the statutes and cases. Contains much other material on business ethics.
  • Wilcox, Clair, and William G. Shepherd. Public Policies Toward Business. Homewood, Ill.: Richard D. Irwin, 1975. Chapters 5 through 10 deal comprehensively with antitrust policies and their effects.

Clayton Antitrust Act

U.S. Congress

Federal Trade Commission

International Business Machines

U.S. Department of Justice

Northern Securities Company

Price fixing

Robber barons

Sherman Antitrust Act

Standard Oil Company

United States Steel Corporation