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Antitrust Laws

Legislation that aims to promote competition in business, break up monopolies, and reduce collusion

What are Antitrust Laws?

Antitrust laws refer to legislation that aims to promote competition in business, break up monopolies, and reduce collusion. They prevent unlawful mergers, act to resist trade, conspiracies, or attempts to form monopolies; as a result, antitrust laws attempt to decrease general unlawful business practices.

 

Antitrust Laws

 

However, most importantly, antitrust laws help to build consumer confidence in corporations and markets and encourage trust in markets, thus aiding market efficiency.

 

Why were Antitrust Laws Created?

Antitrust laws were created to regulate the power of large corporations known as trusts; hence, antitrust laws. With corporations holding too much power, they were able to set prices and take advantage of consumers.

An example of one of the main trusts was Standard Oil Company, which was owned by John D. Rockefeller. The Standard Oil Company built a monopoly in the late 1800s by entering into lucrative rebate deals with railroads and by threatening competitors economically. By being a monopoly, the company was able to set prices and control supply.

Consequently, it worked adversely for consumers as there was no alternative source for oil, which allowed them to be taken advantage of. Thus, the Sherman Act was passed and aimed to prevent agreements between companies that would limit competition and made it illegal to obtain a monopoly if it was done by not competing fairly or cheating.

As a result, the act was able to decrease price-fixing and break up large trusts. Antitrust laws are very important to maintain a healthy and efficient economy, where prices and market demand and supply are efficient.

 

Cartels and Collusion

One of the main goals of antitrust laws is to prevent cartels and collusion. A cartel is a coalition of market participants who aim to improve their profits and dominate the market by colluding with each other.

Cartels can participate in many actions to take advantage of markets and unfairly boost profits; these actions include price-fixing, restricting supply, and bid rigging. Bid rigging takes place when two or more entities collude and decide ahead of time who is going to win a contract.

An example of a cartel participating in bid rigging would be if there were four large companies in an industry, and for each contract, the cartel chooses a company that would win it. The companies in the cartel agree to the arrangement so long as they are promised to win future contracts. If it is played out correctly, the cartel would absorb all of the market share and would be able to set prices, discouraging competition.

 

Antitrust Laws – Examples

 

The Sherman Act

The Sherman Act was created to outlaw any contract or conspiracy to resist trade and any monopolization or conspiracy to monopolize. The act aimed to prohibit unreasonable resistance of trade; however, it did not prohibit all trade resistance. It was an important clause, as many ethical and legal business actions could resist trade, for example, forming a partnership.

The consequences of violating the Sherman Act include a fine of up to $100 million for corporations and $1 million for individuals. Additionally, 10 years in prison could also be enforced to those who violate the act.

 

The Federal Trade Commission Act

The Federal Trade Commission Act prohibits unfair methods of competition and deceptive acts or practices. Additionally, the Sherman Act is inclusive in the Federal Trade Commission Act, in that if an action violates the former, it also violates the latter.

With the passing of The Federal Trade Commission Act, the Federal Trade Commission was created. It upholds The Federal Trade Commission Act and seeks monetary remedy or other forms of relief for consumers that have been mistreated. The Federal Trade Commission also conducts investigations and gathers information relating to businesses and the management of entities participating in commerce.

 

The Clayton Act

The Clayton Act was created to cover specific actions that The Sherman Act did not cover; they include mergers and interconnected boards between competitors. More specifically, The Clayton Act prohibits mergers that will result in a monopoly or substantially less competition.

Also, if a company is planning a large merger or acquisition, it must notify the government in advance. As a result, The Clayton Act helps protect American consumers by stopping mergers or acquisitions that will decrease competition and drive up prices.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Celler-Kefauver Act
  • Dodd-Frank Act
  • Hart-Scott-Rodino Act
  • Sherman Antitrust Act

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