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What is antitrust law?
Antitrust laws are regulations that encourage competition by limiting the market power of a particular firm. This often involves ensuring that mergers and acquisitions do not overtly concentrate large market power or form monopolies. Antitrust laws can also encourage the breakup of firms that have become monopolies.
Antitrust laws also seek to prevent multiple firms from joining together to form a cartel that limits competition through practices such as price fixing. Due to the complexity of deciding which practices limit competition, antitrust law has become a specialized field of law.
Key ideas
Antitrust laws were designed to promote and encourage competition within all sectors of the economy.
In the United States, the Sherman Act, the Federal Trade Commission Act, and the Clayton Act are the main antitrust laws.
Today, the Federal Trade Commission, sometimes in conjunction with the Department of Justice, is tasked with enforcing antitrust laws in the United States.
Understanding Antitrust Regulations
In the United States, antitrust laws are a broad group of state and federal laws designed to ensure that businesses compete fairly. “Monopoly,” in antitrust, refers to a group of businesses or a business that forms a monopoly in order to dictate the price in a particular market.
Proponents of these measures say that antitrust laws are necessary and that competition among sellers gives consumers lower prices, better quality products and services, more choice, and more innovation. Most people agree with this concept and the benefits of an open market. However, there are those who claim that allowing companies to compete as they see fit would ultimately give consumers the best prices.
Following the example of the United States, other jurisdictions such as the countries of the European Union, Latin American countries, African nations, China and their Asian counterparts have created their own versions of antitrust laws in order to prevent companies from abusing their power. market. This abuse of market position is usually reflected in higher costs or poor quality services for consumers when the companies that provide a particular service do not have competition.
Antitrust laws
The Sherman Act, the Federal Trade Commission Act, and the Clayton Act are the main laws that established the foundation for antitrust regulation in the United States. Before the Sherman Act, the Interstate Commerce Act was also beneficial in establishing antitrust regulations, although it was less influential than some of the others.
The United States Congress passed the Interstate Commerce Act in 1887 in response to growing public demand that rail lines be regulated. Among other requirements, the law ordered rail lines to charge passengers a fair rate and publish these rates publicly. It was the first example of antitrust law, but it was less influential than the Sherman Act, which was passed in 1890.
The Sherman Act outlawed contracts and conspiracies that curbed trade and/or monopolized industries in an attempt to stop competition from new entrants or to fix prices. At that time, the companies divided the markets and set prices in each of them as they pleased. Similarly, companies rigged public contract bids to gain market position. The Sherman Act established specific penalties and fines for those who attempted to capture market power or profit from their market power at the expense of consumers.
In 1914, Congress passed the Federal Trade Commission Act, prohibiting unfair competitive practices and deceptive practices and actions. The Clayton Act was also enacted in 1914, addressing specific practices that the Sherman Act had not prohibited. For example, the Clayton Act prohibits the appointment of the same person to make business decisions in companies that are in competition with each other.
Special considerations
In the United States, the Federal Trade Commission and the Department of Justice are tasked with enforcing federal antitrust laws. In some cases, these two authorities may also work with other regulatory agencies to ensure that certain corporate mergers are in the public interest.
The FTC generally focuses on sectors of the economy where consumer spending is high, including health care, medicine, food, energy, technology, and anything related to digital communications. Factors that could prompt an FTC investigation include merger documents and notices, certain consumer correspondence from the public and businesses, Congressional investigations, or articles on economic and consumer-related topics.
If the FTC believes that a law has been violated, the agency will try to stop the questionable practices or find a resolution for the actor that is carrying out the anti-competitive practices, for example, a proposed merger between two competitors. If no resolution is found, the FTC may file an administrative complaint and/or seek injunctive relief in federal court.
The FTC could also refer evidence of antitrust violations to the Department of Justice. The Department of Justice has the power to impose criminal sanctions and maintains antitrust jurisdiction in certain sectors, such as telecommunications, banks, railroads, and airlines.
Example of Violation of Antitrust Laws
Google has long been a dominant player in the web search advertising market. This enormous market power has made the company the object of great attention by regulatory authorities, both in the United States and in the European Union.
In early 2014, Google proposed an antitrust settlement with the European Commission. Google said it could display results from at least three competitors each time it showed results for specialized searches related to products, restaurants, and travel. Competitors, instead, could be liable to pay Google each time someone clicked on specific types of results displayed next to Google’s results, with the search engine choosing an independent monitor to decide the amount of the payment. .
The proposal stipulated that content providers such as Yelp could choose to remove their content from Google’s specialized searches without facing penalties. The search giant also suggested removing conditions that made it difficult for advertisers to move their ad campaigns to competitors; Sites that use Google’s search tools may have shown ads for other services. Google’s proposal was ultimately not accepted.
Interesting fact: On October 20, 2020, the United States Department of Justice filed an antitrust lawsuit against Google for anti-competitive practices related to its alleged market dominance in web search ads.
Practices that the antitrust laws face
Antitrust laws are aimed at challenging a whole host of practices that significantly maximize corporate profits at the expense of consumers.
The main practices that the antitrust laws face are:
Market division
Market division is a scheme devised by two or more entities to maintain their business in specific geographic territories or customer types. This scheme could also be called a regional monopoly.
To illustrate this, suppose one company operates in the Northeast and another company operates in the Southwest. If Company A agrees to stay in the Northeast, Company B will not enter the Northeast, and since the costs of doing business are so high that startups have no chance to compete, both companies have a de facto monopoly.
In 2000, the Federal Trade Commission found FMC guilty of collusion with Asahi Chemical Industry for carving up the market for microcrystalline cellulose, a primary compounder for pharmaceutical tablets. The Commission prohibited FMC from distributing microcrystalline cellulose to any competitor for ten years in the United States, and also prohibited the company from distributing any Asahi products for five years.
Bid-rigging
The illegal practice between two or more companies colluding to win a contract is called bid rigging. When bids are made, “losing” parties generally make lower-quality bids in order to allow “the winner” to succeed in securing a deal. This practice is a crime in the United States and comes with monetary penalties and even imprisonment.
As an example of this, we can assume that there are three companies and that all three have decided to secretly operate as a cartel. Company 1 will win the current bid, to the extent that it allows company 2 to win the next one and company 3 to win the one after that. Each company plays the same game so all three retain their market power and prices, thereby preventing competition.
Forms of bid rigging
Bid rigging can be divided into the following forms: Bid suppression, Complementary bids, and Bid rotation.
Suppression of bids: Competitors abstain from a bid or withdraw from a bid so that a designated winner of the bid is accepted.
Complementary Offers: Also known as cover or courtesy offers, a complementary offer occurs when competitors collude to present unacceptably high offers to the buyer or include special provisions in the offer that effectively make it impossible to accept. Complementary bids are the most frequent form of bid rigging and are designed to defraud bidders by creating the illusion of genuine competition.
Bid Rotations: In bid rotations, competitors take turns being the cheapest bidder on various contract specifications, such as contract size and volumes. Strict contract rotation models violate the law of chance and point to the presence of collusive activity in bids.
Price fixing
Pricing occurs when the price of a product or service is set by a business intentionally rather than letting market forces naturally determine prices. Several businesses can come together to fix prices and ensure their profitability.
As an example, we can say that two companies are the only suppliers of a certain industry, and their products are so similar that the consumer is indifferent to any option, except for the price. In order to avoid a price war, companies decide to sell their products at the same price to maintain profit margins, resulting in higher costs than the consumer could otherwise bear.
For example, Apple lost an appeal in light of a 2013 Justice Department ruling that found the company guilty of price-fixing for ebooks. Apple was found liable and had to pay $450 million in damages.
Monopolies
Usually, when most people hear the term “antitrust” they think of monopolies. Monopolies refer to the dominance of an industry or sector by a company or a firm that has no competition.
One of the most well-known cases in antitrust legislation in recent memory involves Microsoft, a company that was found guilty of anti-competitive and monopolistic actions by forcing the implementation of its browsers on the computers on which its Windows operating system was installed.
Regulators must also ensure that monopolies only emerge in a naturally competitive environment and gain market share simply through innovation and commercial acumen. It is only acquiring market power through exclusivist or predatory practices that are illegal.
monopolistic behavior
Below are some of the monopolistic behaviors that are the subject of criminal legal action.
Exclusive supplier agreements: This occurs when a supplier cannot sell to different buyers. This stifles competition against the monopolist to the extent that the company will be able to buy supplies at lower costs and may prevent buyers from producing similar products.
Tying the sale of two products: When a monopoly has market dominance in one product but wants to gain market power with another product, it can tie the sales of the dominant product to the second product. This forces customers to buy the second product, which they may not want or need.
Predatory pricing: This is somewhat difficult to prove and requires a thorough review by the FTC. Predatory pricing happens when a company artificially lowers prices over time. This practice can be considered monopolistic if the company that executes it has the sufficient market power to recover from the losses.
Denial of agreements: Like any other company, monopolies can choose who they do business with. However, if they use their market power to prevent competition, this may be considered a violation of antitrust laws.
Interesting fact: In 2020, the United States Department of Justice sued the internet search giant, Google. Google allegedly engaged in monopolistic practices in the online search ad market
Fusions and acquisitions
No type of antitrust law would be complete without taking into account the problem of mergers and acquisitions. These can be divided into horizontal, vertical, and mergers with potential competitors.
Let’s see how each of these practices works:
Horizontal mergers
When market-dominant firms prepare for a merger, regulators must decide whether the new firm can become a monopoly. With monopoly power can come anti-competitive practices for the firms that are still in the market. For example, the company that makes Malibu rum, which has a market share of 8% of total rum sales, had proposed to buy the company that makes Captain Morgan rum, which has a market share of total rum sales. of 33% rum. The new company would have a 41% market share.
Meanwhile, the dominant firm would have 54% of total sales. This would mean that the premium rum market would be made up of only two competitors responsible for 95% of the total rum production. Regulators decided the merger was inconvenient as the remaining two companies could collude to raise prices. As a result, Malibu was forced to divest its rum business so that it could proceed with the merger.
Unilateral effects
In the United States, the FTC will frequently oppose mergers between two rival firms that offer very similar products. The argument the FTC uses is that the merger will eliminate beneficial competition and innovation. In 2004, the FTC did just this, challenging a proposed merger between General Electric and a rival firm. The rival firm manufactured competitive equipment for non-destructive testing. In order to go ahead with the merger, General Electric agreed to divest its non-destructive testing equipment business.
Vertical fusions
Mergers between buyers and sellers can improve business efficiency, which translates into lower prices for consumers. But when the vertical merger has a negative effect on competition due to competitors’ inability to access supplies, regulators might require certain conditions to go ahead with the mergers. For example, Valero Energy had to ditch certain businesses and form an informational firewall when it acquired an ethanol finisher operator.
Mergers with potential competitors
Over the years, regulators have challenged presumptive mergers with potential competitors, especially in the pharmaceutical industry. Generally, these presumptive mergers tend to be proposed between dominant players in the market and new players. The new players are potential competitors to the dominant player. By preventing mergers, regulators ensure that competition occurs in the market. In this way, better prices and services are generated than would have been the case if the mergers had gone ahead.
Why are antitrust laws necessary?
Antitrust laws were put in place to prevent companies from getting greedy and abusing their power. Without these regulations, many politicians claim that big businesses would be able to kill off smaller ones. This could result in less competition and fewer choices for consumers. Likewise, monopolistic practices would lead to higher prices, lower product quality and less innovation, among other disadvantages.
What are the three big antitrust laws?
In the United States there are three major laws in favor of fair competition. These are the Sherman Act, the Federal Trade Commission Act, and the Clayton Act.
Who enforces these laws?
The Federal Trade Commission (FTC) and the Department of Justice (DOJ) are primarily responsible for enforcing antitrust laws. The FTC focuses on segments of the economy where consumer spending is high. On the other hand, the DOJ maintains the only antitrust jurisdiction in sectors such as telecommunications, banks, train lines, and airlines. The DOJ also has the power to impose criminal sanctions.
Antitrust law in the European Union
European Competition Law is the antitrust law in use within the European Union. This law promotes the maintenance of competition within the Single European Market by regulating anti-competitive conduct by companies. This is in order to guarantee that cartels or monopolies are not created that harm the interests of society in general.
European competition law today derives mainly from articles 101 to 109 of the Treaty for the Functioning of the European Union (TFEU), as well as from a series of regulations and directives. The four main policy areas of European Union antitrust law include:
Cartels, or control by collusion and other anti-competitive practices under article 101 of the TFEU.
Dominant Market Position: Or the prevention of abuse by firms with a dominant position in the market. This is under article 102 of the TFEU.
Mergers and acquisitions: Control of proposed mergers, acquisitions and joint ventures involving companies that have a certain and defined amount of market in the European Union. This is in accordance with the Law of the European Union of Mergers.
State aid: Control of direct and indirect aid given by member states of the European Union to companies. This is under article 107 of the TFEU.
The primary authority for enforcing antitrust law in the European Union is the European Commission and its Directorate General for Competition. Although the states help in some sectors, such as agriculture, and these are managed by other General Directories. Boards can order that states’ improper aid be returned, as was the case in 2012 with Malev Hungarian Airlines.