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Clayton Antitrust Act

An antitrust legislation that sought to further strengthen the Sherman Antitrust Act

What is the Clayton Antitrust Act?

The Clayton Antitrust Act is a United States antitrust law that was enacted in 1914 with the goal of strengthening the Sherman Antitrust Act. After the enactment of the Sherman Act in 1890, regulators found that the act contained certain weaknesses that made it impossible to fully prevent anti-competitive businesses practices in the United States.

Senator Henry Clayton of Alabama introduced the Clayton Antitrust Bill to the US Congress in 1914. The US Congress passed the bill in June 1914, and President Woodrow Wilson later signed it into law.

 

Clayton Act

 

The Clayton Antitrust Act sought to address the weaknesses by expanding the list of prohibited business practices that would allow a level playing field for all businesses. Some of the practices that the law focuses on include price fixing, exclusive dealings, price discrimination, and unfair business practices, etc.

 

History of the Clayton Act

In the 1880s and 1890s, the United States experienced rapid economic growth. The economic expansion attracted immigrants from Europe who were enticed by the higher wages in the United States. The immigrants were employed in the rapidly growing industries such as railroad transport and mining industries.

At that time, large companies grew even bigger by acquiring and merging with other companies in their industries to form conglomerates. They attempted to monopolize the industry, and the public viewed them as possessing too much power that could easily be abused. The companies used anti-competitive tactics such as price fixing, predatory pricing, and other attempts to monopolize the market.

Small business owners argued that the conglomerates directly impacted their operations, pushing them out of the market. The small businesses called for regulation of the market to prevent unfair business practices that benefited the large companies at the expense of the small businesses and the consumers.

Advocates of antitrust laws argued that regulating the market would not only protect small businesses but also result in lower prices for goods and services, increased innovation, and a greater variety of products.

 

Specifics of the Clayton Antitrust Act

As of 2016, the Clayton Antitrust Act comprised 26 sections. The following are some of the most notable sections that influence business practices in the United States:

 

Section 2: Price discrimination

Section 2 of the Clayton Act deals with price discrimination, where a company decides to offer different prices for the same product or service. Such a strategy attempts to maximize the price that each customer is willing to pay. Price discrimination is intended to lessen competition or create a monopoly.

The section was later strengthened in 1936 through the Robinson-Patman Act, which was designed to protect small retailers from anti-competitive practices pursued by large business chains and discount stores. An example of the anti-competitive practices is fixing minimum prices for certain retail products.

 

Section 3: Monopoly or attempts to create a monopoly

Section 3 deals with business practices that attempt to create a monopoly. The section prevents businesses from carrying out a sale, lease, contract for sale, or agreements that may reduce the competition or create a monopoly in its specific industry.

 

Section 7: Mergers and acquisition

Section 7 prevents companies from merging or acquiring other smaller entities with the goal of gaining too much power that lessens competition. The law extends to other antitrust laws where a merger transaction would essentially create a monopoly.

The Clayton Act was strengthened by the Hart-Scott Antitrust Act, which requires companies planning a merger or acquisition to notify the Federal Trade Commission and the Department of Justice. The agencies reserve the right to reject or approve a merger transaction depending on their findings.

 

Enforcement of the Clayton Antitrust Act

The Clayton Antitrust Act allows parties injured through violations of the act to sue for damages. Individuals and corporations that violate the act can be sued for three times the amount of damages suffered by the victim. The provision is further reinforced by the injunctive relief in Section 16 that allows the court to force defendants to dispose of assets to pay off damages.

For example, if a consumer suffered damages worth $10,000 through a false advertisement, the consumer can sue for damages for up to $30,000. The act gives the Federal Trade Commission the power to enforce it.

 

Exemptions to the Clayton Act: Labor Unions

Unlike the Sherman Act, the Clayton Antitrust Act exempts labor unions and agricultural activities from their regulations. According to the law, the labor of a human being does not constitute a trade or a commodity, and should not be subjected to the same regulations as companies engaging in trade.

As such, the Clayton Act prohibits companies from preventing activities of labor unions such as strikes, boycotts, collective bargaining, and compensation disputes. Labor unions can negotiate for better employment benefits and better wages without being accused of price fixing. Courts can only issue injunctions against labor unions where their activities threaten to cause property damage.

 

Related Readings

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

  • Competitive Advantage
  • Market Power
  • Oligopoly
  • Sherman Antitrust Act

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