AMERICA'S ANTITRUST LAWS: EXPLAINED IN 60 SECONDS
America’s Antitrust Laws Protect Competition and Benefit Consumers
Antitrust laws ensure competition in a free and open market economy, which is the foundation of any vibrant economy. And healthy competition among sellers in an open marketplace gives consumers the benefits of lower prices, higher quality products and services, more choices, and greater innovation.
The core of U.S. antitrust law was created by three pieces of legislation: the Sherman Antitrust Act, the Federal Trade Commission Act, and the Clayton Antitrust Act. These laws have evolved along with the market, vigilantly guarding against anti-competitive harm that arises from abuse of dominance, bid rigging, price fixing, and customer allocation.
Table of Contents
- Understanding Antitrust: Myth v. Fact
- Antitrust “IS” v. Antitrust “IS NOT”
- Important Cases and Precedents
- Antitrust 101
- Private Litigation & Liability Concerns
- Unlocking Antitrust: When do low prices become predatory?
- Unlocking Antitrust: Antitrust Is Not a Weight Loss Program
- Unlocking Antitrust: Tying & Monopoly Leveraging
- Dirty Little Secret About Litigated Mergers
- Unlocking Antitrust: Antitrust Places Little Obligation to Help Competitors (Part 3)
- Unlocking Antitrust: Antitrust Places Little Obligation to Help Competitors (Part 2)
- Unlocking Antitrust: Antitrust Places Little Obligation to Help Competitors (Part 1)
- Unlocking Antitrust: Vertical Mergers
- Unlocking Antitrust: Horizontal Mergers
- Unlocking Antitrust: Nascent Aquisitions
America’s Antitrust Laws: Myth vs. Facts
America’s antitrust laws have ensured competition thrives, providing consumers with the benefits of lower prices, higher quality products and services, more choices, and greater innovation.
However, some seek to rewrite these laws to undermine consumers' ability to determine winners and losers in the marketplace. Before Congress starts making unnecessary and harmful changes to existing antitrust laws, it’s important to set a few things straight.
Myth: Antitrust enforcement is a form of regulation.
Antitrust is a law enforcement tool, not a regulatory tool. It is rooted in the idea that competitive markets are self-policing and that consumers benefit when there is vigorous, even ruthless, competition. Where competition in the market is damaged by certain competitor’s action, antitrust steps in on fact specific grounds and corrects the action of a particular company or group of companies. Antitrust is designed to restore the self-policing power of competition in the market. Regulation on the other hand is about imposing an outcome in the market.
Myth: The antitrust laws have a hard time keeping up with the modern economy.
Antitrust laws endorse a timeless process that can be universally applied to every sector of the economy. The rule of reason is a process that relies on concrete theories of harm that are supported by sound economic analysis that can test the validity of those theories. Economic analysis is used to evaluate the procompetitive effects of a potential merger or specific conduct in the market and weighs that against any anticompetitive effects. Only when the anticompetitive effect is greater than any procompetitive effect is antitrust enforcement warranted.
Myth: Antitrust is only about price and output.
U.S. antitrust law has long considered not only price and output but also quality and innovation. A long list of cases shows that the consumer welfare standard considers a host of factors beyond price, including reduced quality, variety, service, or diminished innovation.
Myth: Antitrust is concerned with fairness.
What is “fair” is not an objective or administrable standard recognized by the antitrust laws. Antitrust law is based in economics, requiring theories of harm with testable implications—something as vague and as subjective “fairness” standard cannot do. Fairness is something left to regulation, which seeks to steer market outcomes, not antitrust which allows competition in the marketplace for consumers to shape market outcomes.
Myth: Monopolies are illegal.
The U.S. Supreme Court has long held that the mere possession of monopoly power, and any associated charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices at least for a short period is what attracts business acumen in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power is not unlawful unless it is accompanied by anticompetitive conduct. In other words, conduct that is distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.
Myth: Mergers must seek permission and receive approval before they can be consummated.
All mergers are presumed legal. No permission is required. What is required for transactions that reach certain thresholds is notification. Upon notification, the antitrust agency can review the transaction, if it takes issue with the transaction the burden to block the transaction falls on the government to ultimately challenge the merger in court.
The Role & Responsibility of Antitrust
There is a debate over antitrust policy and the appropriate level of enforcement. The Chamber believes strongly in market competition, over government regulation. For this reason we support antitrust enforcement when it seeks to protect or restore competition in the market in the economic interest of consumers, as opposed to advancing amorphous, and even conflicting, policy goals that have little to do with competition.
The Chamber welcomes a debate over the appropriate level of enforcement. We give antitrust enforcers a wide birth even as antitrust enforcement has had numerous examples of misguided enforcement actions. This is because antitrust enforcement, when done correctly, is fact-specific and impacts a limited number of culpable economic players, not an entire industry. Further, in its more than 100 year history, antitrust mistakes have been overcome with a deeper understanding of economics, without the need for constant course corrections from changes in the statutes.
The fact-based and economically grounded consumer welfare standard currently implemented by U.S. courts and enforcers has proven to be an effective tool in applying the antitrust laws and rejects the standards applied prior to the mid-1970's that were based on vague, subjective political and policy goals that second guessed the market and ignored consumer benefits. Moreover, over the years we have seen that the antitrust laws and the consumer welfare standard are sufficiently flexible to evaluate new economic theories of harm, including today’s digital economy.
However, today too many voices – often with a radical view of antitrust and a broader policy agenda – are trying to move the debate from whether the antitrust laws are being adequately enforced to a troubling notion that the antitrust laws need to be updated. The Chamber strongly opposes statutory changes, because we believe suggested changes are based on inherently flawed theories, reject decades of bi-partisan consensus, and present a whole host of potential dangers to our economy, including hampering innovation, politicizing antitrust, and interfering with U.S. companies' ability to compete with Europe, China and the rest of the world.
At a fundamental level it is important to evaluate the current antitrust policy and enforcement debates, as well as potential changes in law, by asking oneself what antitrust is and is not.
The Dangers of Upending Decades of Supreme Court Precedent
Antitrust critics have signaled their interest to radically change existing U.S. antitrust law. Their ideas often seek to overturn decades of Supreme Court precedent (over 50 years in some cases), risking the very harms the Court sought to prevent.
Proposed changes look to abandon the Court’s insistence that antitrust law be ground in the rule of reason and adhere to economic evidence, rejecting short cuts used to reach findings of harm. Below are some of the most important Supreme Court determinations that have thoughtfully shaped the enforcement approach to antitrust:
Antitrust 101: Key Laws
Sherman Act: The Sherman Act, established in 1890 as the first piece of antitrust legislation, proscribes unlawful business practices in general terms, leaving courts to decide which ones are illegal based on the facts of each case. Supreme Court and other federal case law have interpreted the Act as prohibiting conduct that harms the competitive process and consumers when it would create or maintain a monopoly. Conduct is found to be unlawful when a plaintiff proves the existence of anticompetitive effects (e.g., substantial foreclosure of rivals resulting in higher prices, reduced output, reduced quality, or reduced innovation) that are not outweighed by procompetitive efficiencies or legitimate business justifications.
Clayton Act: The Clayton Act, enacted in 1914, prohibits mergers and acquisitions when the effect “may be substantially to lessen competition, or to tend to create a monopoly.” As amended by the Robinson-Patman Act of 1936, the Clayton Act also bans certain discriminatory prices, services, and allowances in dealings between merchants. The Clayton Act was amended in 1976 by the Hart-Scott-Rodino Antitrust Improvements Act to require companies planning large mergers or acquisitions to notify the government of their plans in advance. The Clayton Act also authorizes private parties to sue for triple damages when they have been harmed by conduct that violates either the Sherman or Clayton Act and to obtain a court order prohibiting the anticompetitive practice in the future.
Federal Trade Commission Act: The Federal Trade Commission Act, enacted in 1919, is enforced by the Federal Trade Commission (FTC). Under this Act, as amended, the FTC is empowered, among other things, to prevent “unfair methods of competition.” While the FTC Act may reach conduct beyond the Sherman Act, the FTC’s 2015 “Statement of Enforcement Principles” clarifies that, in enforcing the FTC Act, the FTC will be guided by the same consumer welfare standard applied under the Sherman Act, and that “an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.”
Antitrust 101: Key Terms
Abuse of dominance: In foreign jurisdictions the term is commonly used to capture anticompetitive behavior of firms that have significant market share. U.S. antitrust law is focused on prohibiting unlawful monopolization or attempted monopolization. Such conduct is only prohibited when a plaintiff proves the existence of anticompetitive effects (e.g., substantial foreclosure of rivals resulting in higher prices, reduced output, reduced quality, or reduced innovation) that are not outweighed by procompetitive efficiencies or legitimate business justifications.
Antitrust bundling claim: An antitrust bundling claim occurs when a firm offers only a package of goods and not the standalone goods. Pure bundling occurs when there are no alternative sellers of the component goods so only the bundle is available. Mixed bundling occurs when both the package and the individual goods are available from the bundling firm. It is important to note bundling has many procompetitive benefits, so the practice is not unlawful. Only after a careful rule of reason analysis can these types of claims rise to level of anticompetitive harm and become a violation of the law.
Antitrust tying claim: An antitrust tying claim is where a customer is interested in buying one product, but in order to buy this product the customer is coerced into buying separate products. It is important to note tying practices can have many procompetitive benefits, so the practice is not unlawful. Only after a careful rule of reason analysis can these types of claims rise to level of anti-competitive harm and become a violation of the law.
Bid rigging: Bid rigging is the way that conspiring competitors effectively raise prices when purchasers — often federal, state, or local governments — acquire goods or services by soliciting competing bids. Essentially, competitors agree in advance who will submit the winning bid on a contract being let through the competitive bidding process.
Cartel: A cartel refers to a group of companies, competing with each other, that form an agreement to set and control the prices for their industry or to allocate the market in a way that has them to agree not to compete against each other. Cartel arrangements along these lines are illegal under U.S. antitrust law and violations include criminal penalties.
Consumer welfare standard: The consumer welfare standard is a broad standard that values what consumers are willing to pay for, and tethers antitrust analysis to the methodological rigors of economics in terms of theories that can be tested and rejected by empirical analysis. Under the standard, antitrust intervention is only justified when the conduct at issue satisfies two tests: First the conduct must distort the competitive process such that equally efficient competitors are incapable of competing. Second, this conduct and distortion must result in harm to consumers. More simply, there must be both a cause and an effect that can be identified before antitrust intervention is warranted. As the FTC has said, it “does not decide who wins and who loses in the marketplace – consumers do that.”
Efficiencies: Antitrust efficiencies are benefits from mergers or business practices that are of value to consumers. For example, efficiencies from vertical mergers often include quality improvements and faster and/or better innovation from coordination in product, design, and innovation efforts; and elimination of free-riding from the harmonization of incentives.
Essential facilities doctrine: The essential facilities doctrine, importantly, has never been recognized by the Supreme Court. The concept suggests that a company or its assets are so vital that other competitors should be given access for the competitor’s use. The doctrine overlooks that a facility is rarely absolutely essential and underestimates the ability of determine rivals to create new ways of doing things or other workarounds to the resulting benefit of consumers. Under this doctrine, there is little incentive to invest. The idea that one company’s hard work should be to the benefit of another company is not compatible with a free enterprise system that relies upon competition. In very limited contexts, outside of antitrust, there are regulatory circumstances, largely infrastructure related, where conditions for access are required under a regulation.
Exclusive dealing: An exclusive dealing contract prevents a distributor from selling the products of a different manufacturer, and a requirements contract prevents a manufacturer from buying inputs from a different supplier. As with other vertical restraints, they are generally procompetitive or benign. These arrangements are judged under a rule of reason standard, which balances any procompetitive and anticompetitive effects. Exclusive dealing is generally unlawful only when practiced by a monopolist.
Excessive pricing: Excessive pricing is the view that a company prices its products at too high of a price point. High prices are not prohibited by U.S. antitrust law. Antitrust avoids trying to subjectively determine the “correct” price, but instead relies on market forces to establish price points in the market. As the Supreme Court has stated: “The opportunity to charge monopoly prices is what attracts business acumen in the first place; it induces risk taking that produces innovation and economic growth.”
Relevant Antitrust Market: Antitrust law analyzing conduct within relevant antitrust markets, which require both product and geographic aspects. A relevant product market consists of all goods or services that buyers view as close substitutes. That means if the price of one product goes up, and in response consumers switch to buying a different product so that the price increase is not profitable, those two products may be in the same product market because consumers will substitute those products based on changes in relative prices. But if the price goes up and consumers do not switch to different products, then other products may not be in the product market for purposes of assessing a merger's effect on competition. Antitrust goes awry if the relevant market is defined too narrowly or too broadly.
Market allocation: Market division or allocation schemes are agreements in which competitors divide markets among themselves.
Vertical mergers: Vertical mergers involve the integration of complements (like nuts and bolts or peanut butter and jelly), which does not reduce competition on its face. Unlike horizontal mergers, vertical mergers do not involve the combination of businesses that are either actual or potential competitors; thus, they result in at least some loss of rivalry and a combination of actual or potential substitutes.
Horizontal mergers: A horizontal merger involve the combination of businesses that are either actual or potential competitors.
Monopoly Power: Monopoly power is the ability to raise market-wide prices above or reduce output below the competitive level. As the Supreme Court has stated: “To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.”
Monopsony/Buyer power: Buyer power arises from monopsony (one buyer) or oligopsony (a few buyers), and is the mirror image of monopoly or oligopoly.
Per se violations: Certain acts are considered so harmful to competition that they are almost always illegal. These include plain arrangements among competing individuals or businesses to fix prices, divide markets, or rig bids. These acts are "per se" violations of the Sherman Act; in other words, no defense or justification is allowed.
Predatory pricing claim: A predatory pricing claim argues prices are artificially low to drive competitors out of the market, only to later raise prices once competitors leave the marketplace. Generally, low prices benefit consumers. Consumers are harmed only if below-cost pricing allows a dominant competitor to knock its rivals out of the market and then raise prices to above-market levels for a substantial time. A firm's independent decision to reduce prices to a level below its own costs does not necessarily injure competition, and, in fact, may simply reflect particularly vigorous competition. Instances of a large firm using low prices to drive smaller competitors out of the market in hopes of raising prices after they leave are rare. This strategy can only be successful if the short-run losses from pricing below cost will be made up for by much higher prices over a longer period of time after competitors leave the market.
Price fixing: Price fixing is an agreement among competitors to raise, fix, or otherwise maintain the price at which their goods or services are sold. It is not necessary that the competitors agree to charge exactly the same price, or that every competitor in a given industry join the conspiracy. Price fixing can take many forms, and any agreement that restricts price competition violates the law.
Refusal to deal claim: A refusal to deal claim typically arises when one firm refuses to work with another firm. Refusals to deal are generally lawful except under very limited circumstances such as when a monopolists terminates a prior, profitable course of dealing with a rival that results in the monopolist sacrificing short-term profits.
Rule of reason: The rule of reason is a full-blown effects-based analysis under which plaintiffs must prove the existence of anticompetitive effects (i.e., substantial foreclosure that results in higher prices and/or reduced output, quality, or innovation) and show that they are not outweighed by procompetitive efficiencies or legitimate business justifications.
Antitrust empowers the market and consumers to set price.
Antitrust is not concerned with size, it is only concerned with how dominance is obtained and maintained in the market.
Antitrust is not about competitors, its about consumers.
Part 3 examines abuse of superior bargaining power.