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Competition and Antitrust

Competition in a free market system benefits consumers through lower prices, better quality products and greater choice. Competition provides businesses the opportunity to compete on price and quality on a level playing field, unhampered by anticompetitive restraints. Though most businesses praise the virtues of our free-market economy, they also strive for monopoly power (also known as market power), which is the ability to significantly increase profits by raising prices above that which would prevail in a competitive market.

The desire to obtain market power  provides a critical incentive for firms to invest and create the products that drive economic growth.  For this reason, the mere possession of market power is lawful where it is the result of superior skill, foresight, and ingenuity. Where monopoly power is acquired or maintained through anticompetitive or exclusionary conduct, however, the conduct may be unlawful. 

Federal antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. They prohibit a variety of practices that restrain trade, such as price-fixing and bid-rigging conspiracies, corporate mergers that reduce competition in particular markets, and single-firm exclusionary acts designed to injure a competitor.

Some antitrust offenses are considered per se unlawful. This means that one need only prove the existence of the conduct. The so-called reasonableness of the restraint is not relevant. The conduct is presumed to be anticompetitive. Other antitrust offenses are judged under the "Rule of Reason" standard. Under this test the question is whether on balance the challenged conduct is anticompetitive. Such an analysis involves the examination of a variety of market and economic factors, such as industry concentration, ease of entry, and the intent of the parties.

Another important distinction in antitrust is between vertical and horizontal conduct. An agreement between actual or potential competitors that may restrict competition is a horizontal restraint. By contrast, an agreement between a supplier and a distributor or a distributor and a retailer is a vertical restraint. Antitrust law is focused much more on horizontal relationships since most (but not all) vertical arrangements do not injure competition and in fact many are procompetitive.

Principal  Antitrust Laws

The Sherman Act was enacted in 1890. Section 1 of the Sherman Act prohibits "contracts, combinations, and conspiracies in restaint of trade or commerce." The statute provides for substantial criminal penalties for violators; individuals convicted face up to ten years in prison and fines up to ten million, corporations can be fined up to 100 million. Section 2 of the Sherman Act makes it unlawful to "monopolize or attempt to monopolize" any part of trade or commerce among the states. Unlike Section 1, Section 2 reaches both joint and unilateral conduct. 

The Clayton Act of 1914 supplements the Sherman Act by prohibiting certain practices that are not specifically mentioned in the more general Sherman Act. Violations of the Clayton Act may include: 1) sale terms that force a buyer not to deal with a competitor of the seller, where such restrictions may substantially lessen competition or tend to create a monopoly, and 2) mergers and acquisitions involving competitors or potential competitors where the effect may be to substantially lessen competition or create a monopoly.

Section 4 of the Clayton Act provides for a private right of action for those injured by an antitrust violation; typically overcharged purchasers.Prevailing plaintffs are entitled to recover three times their actual damages plus costs and attorney fees. Treble damages serves the dual purpose of detering anticompetitive conduct and providing an incentive to private individuals to bring actions that benefit not just them but the economy as a whole.

The Federal Trade Commission Act of 1914 prohibits "unfair methods of competition" and "unfair or deceptive acts or practices." Violations of the Sherman Act also violate the FTC Act. In addition, even if a particular practice does not violate the letter of one of the other antitrust laws, it may still violate the FTC Act. 

The Robinson Patman Act of 1936 prohibits certain discriminatory prices, services, and allowances in dealings between merchants. For example, in some instances it may be unlawful for a seller to charge lower prices to favored buyers, whether the price discrimination is instigated by the seller or forced upon the seller by the buyers. Certain defenses are provided, such as if the discounts are made to meet a competitor's lower prices, or if the discounts reflect lower costs with respect to the manufacture, sale, or delivery to the favored buyer.

Several federal laws provide specific industries with a degree of immunity from application of the antitrust laws. These laws benefit the particular industry but perhaps not the economy as a whole. Examples are the McCarren-Ferguson Act (insurance industry), the Capper-Volstad Act (agricultural cooperatives), and the Newspaper Preservation Act (newspapers).

All the states have their own antitrust laws, many of which closely parallel the federal laws described above. The Minnesota antitrust laws are found here.

Antitrust Enforcement Agencies

Federal antitrust laws are enforced both by the Antitrust Division of the United States Department of Justice and the Federal Trade Commission. Both agencies have enforcement powers with respect to some laws. For example, both agencies can challenge anticompetitive mergers brought under the Clayton Act. However, only the Antitrust Division can charge criminal violations of the antitrust laws. And only the FTC can bring actions under the FTC Act. The Minnesota antitrust laws are enforced by the Office of the Attorney General.

Key Supreme Court Antitrust Decisions

The antitrust laws, and in particular the Sherman Act, are very general and do not specifically identify precisely what type of conduct is unlawful. Hence the courts have played a large role in interpreting the laws on a case-by-case basis. Over time, the Court has increasingly relied on sophisticated economic analysis in determining the likelihood that certain conduct is anticompetitive. One consequence of the changing analysis is that a number of earlier decisions have subsequently been overruled.

Some of the more significant Supreme Court decisions (in chronological order):

In the 1911 decision in Standard Oil v. United States, the Court announced that, despite its broad language outlawing all restaints of trade, the Sherman Act prohibited only "unreasonable" restraints. The "rule of reason" was thus born. The result of the case was the break up of Standard Oil (which controlled 90 percent of the oil refining market) into 34 separate, competing companies.

The Court enunciated the Per Se rule in United States v. Trenton Potteries (1926) and United States v. Socony-Vacuum Oil (1940), ruling that horizontal price-fixing agreements are unlawful "without the necessity of minute inquiry whether a particular price is reasonable or unreasonable," and that "no showing of so-called competitive abuses or evils which those agreements were designed to eliminate or alleviate may be interposed as a defense."

In Brunswick v. Pueblo Bowl-O-Mat (1977), the Supreme Court rejected the notion that a private plaintiff could collect damages resulting from an increase in competition. The Court emphasized that private damages must be based on conduct that causes injury of the type that the antitrust laws were designed to prevent. Plaintiffs must show they were harmed by the anticompetitive effects of the defendant's conduct, for the antitrust laws were designed to protect competition, not competitors.

In Matsushita Electric v. Zenith Radio (1986), the Court poured cold water on theories of liability that made little economic sense, and expressed much scepticism of liability theories based on price cutting -- such as predatory pricing -- which is often "the very essence of competition."

In State Oil Co. v. Kahn (1997), the Court overruled an earlier decision and held that vertical maximum price fixing (an agreement between a distributor and retailer that the retailer would not charge a price above X) is not per se unlawful but rather should be judged under the Rule of Reason standard.

In Leegin Creative Leather Products v. PSKS (2007) the Supreme Court overruled a near 100-year-old precedent and ruled that it was not per se unlawful for a manufacturer to agree with its distributor to set the minimum price the distributor can charge for the manufacturer's goods. Such agreements are to be judged under the rule of reason.


If you have any questions about competition law, feel free to call me at (952) 239-0346

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