Companies must make business decisions to ensure success in the marketplaces of today and tomorrow. While many companies combine social responsibility goals with their business objectives, the fact remains that companies exist to make money. Many laws and regulations are in place to help manage the economy, protect consumers and ensure a marketplace with competition and choices that keep the power in the hands of the consumer. Some of the most important controlling regulations fall into the category of antitrust laws.
Antitrust Act Definition
The phrase antitrust comes from the enactment of laws to counter the corporate conglomerate trusts that controlled business historically. The phrase has come to refer to laws and regulations intended to ensure healthy competition in the marketplace by monitoring the economic power that businesses are allowed to hold and wield. These laws exist to protect the consumer by allowing fair competition in an open market.
Threats to Competitive Business
Modern laws now encompass a number of corporate behaviors that are deemed threats to this naturally competitive environment, including:
Restraints to trade such as price fixing, market division or rigged bids between two or more companies. Any sort of collusion between businesses that harms a third party in order to benefit those businesses qualifies under this category. The expectation is that each business acts for its own benefit, allowing the rule of competition to continue to benefit the consumer.
Attempts to merge or consolidate corporations to gain a monopoly, such that a corporation’s economic power can be used to harm other competitors. Monopolization is very clearly defined, and the laws can force large corporations to break up or disassemble along with assessing massive penalties. Monopolies are by their nature contrary to the competitive marketplace.
Deceptive acts or practices such as misleading or false advertising that can lead to consumer misunderstanding of the market and of their rights.
Discriminatory pricing schedules, product tying, predatory pricing and other pricing and sales schemes can have harmful effects on the competitiveness of a market segment.
It’s important to note that most antitrust laws allow room for restrictions of trade that might occur, but benefit the competitive marketplace and the consumer, or arrangements and agreements that have no effect on the market competitiveness. This does produce an area of negotiation within which actions can be argued to be with or against the laws, but only applies in certain cases. Activities like price fixing are assumed to always have a negative impact on competitiveness and thus are always deemed illegal.
Purpose of the Antitrust Act
Antitrust laws follow the economic theory that competition in the marketplace ensures that consumers obtain the best quality product for the most affordable price and inspires competitive innovations to keep markets growing and evolving. The idea behind antitrust regulation is that markets without competition will end up serving the desires of those who control the corporations, meaning big business will have the power to increase profits at the expense of consumers, prices will rise and quality will fall, and consumers will have no choice in purchases to meet their needs. This stifles innovation and growth and benefits the few business owners rather than the majority of average consumers.
Competition in a free market means there will be many options available on an equal playing field to consumers who can then vote with their wallets by purchasing the goods and services with the most value to them. In a competitive market, companies are still at risk of going out of business, but they will fail because they have not met customer needs, not because they have been driven out of operation by a larger corporation with more resources and more control.
Development of the Antitrust Laws
In the United States, antitrust laws came about due to the formation of large trusts consisting of multiple related businesses that wanted to control their particular markets and thus ensure high profits. This started in the late 19th century when small railroads were being purchased and consolidated into large, dominating organizations, and manufacturing plants were likewise combining forces to gain economic power. In a nation whose core constitution proclaimed it a power of the people, it became increasingly alarming to see economic power in the hands of a few, rather than in the hands of the many – thus protective antitrust laws were born.
The Sherman Antitrust Act was passed nearly unanimously in Congress in 1890, providing a foundation that is still the core of antitrust law today. The Act set out stipulations against agreements that restrain trade and monopolies that abuse their power to interfere with the market. This act was followed in 1914 by the Clayton Antitrust Act, which prohibited a number of specific business interactions like product tying and price discrimination when they negatively interfered with competition or damaged the market. The year 1914 also marked the launch of the Federal Trace Commission, a body whose sole purpose is the regulation of a competitive marketplace and consumer protections.
It’s important to note that all of these actions are also governed by the rule of reason established by the U.S. Supreme Court in a 1911 case regarding the breakup of a monopoly. The theory of the rule of reason establishes that not all big business is necessarily bad, and not all monopolies are inherently harmful to the marketplace. The rule leaves it up to the courts to determine whether an action damages competitiveness within its market and/or damages the economic welfare of competitors in the market. Thus, arrangements that may appear as monopolization but cause no harm to the competitive state of the market may, in fact, be legal.
Antitrust Laws in Today’s Economy
Today’s economy differs from 19th- and 20th-century economies in a number of ways, but none is more substantial than the development of the internet as a platform for commerce. Electronic communication has both positive and negative effects on a market’s ability to stay open and competitive.
Impact of the Internet on Antitrust Laws
For example, the internet opens up wide options in customer bases to entrepreneurs looking to start a business. This ensures that plenty of competition exists in any particular industry. It’s incredibly easy for an online company to expand into new areas of market share or explore new customer bases without significant investment in a physical presence in those areas.
However, the interaction between consumer access to free internet space and the companies that provide that access can present a number of conflicts of interest. For example, Amazon can provide an almost unlimited list of types of coffee for consumers to buy, however, the company may be influenced by certain companies to place their products higher in the listings or have it appear in more searches. This affects the competitiveness of alternate companies and controls what the consumer sees and is likely to purchase.
Another example looks at internet connection providers themselves, like Verizon and AT&T, which may make arrangements with other companies to provide better and faster access to one website over another, affecting the consumer experience.
Application and Language of Antitrust Laws
Antitrust laws do, in fact, apply to all purchases and transactions, even those online, but much of the legal language remains focused on the conglomerate trusts of the 1900s. It’s important to understand how these laws may come into play with the new growing markets of today’s economic landscape.