Antitrust laws in the United States

Author- | Posted- | Updated: July 7, 2020 |

In the United States, antitrust laws play a major role in ensuring free and fair competition.  Free and open competition is beneficial for consumers as well as society and the economy. However, a large number of consumers might not have even heard of these laws and how they protect them.  

Apart from the Federal government, most states also have antitrust laws. Every year, the antitrust laws save the consumers millions or even billions in overcharges. These laws prohibit unfair business practices that may deprive the consumers of the benefits of competition. Unfair and deceptive practices generally drive prices higher while the product quality remains lower.

 When there is free competition in the market, each of the competing firms tries to attract consumers by reducing prices and increasing the quality of their products and services. Higher competition also brings profit opportunities and stimulates businesses to find new and more innovative methods of production. 

Higher competition benefits the consumers in this way by lowering prices and increasing the quality as well as the variety of products and services available in the market. In such a scenario, the companies that do not focus on the needs of the consumers are left behind in the race.

The benefits that consumers derive in a competitive market are lost when competitors agree to collaborate and fix prices, rig bids or even allocate customers. When competitors collaborate in unfair and deceptive ways or agree to fix artificially high prices, these prices do not reflect the actual costs and therefore distort how the society’s resources are allocated.

 The result is that it is not only the US consumers and taxpayers who stand to lose, but the overall US economy is also affected negatively.

If there is free and fair competition in the US market, there is no need for the government to intervene. The government and law agree that there are certain types of agreements and collaboration between competitors that may actually benefit American consumers.

All agreements between competitors are not illegal. For example, there are certain joint arrangements between competing firms like research and development projects that may actually benefit the consumers and help the collaborating firms compete more effectively against other firms in the market.

 However, one key thing that is notable about this scenario is that law does not condemn all the agreements between companies but only the ones that threaten to grow the prices or deprive consumers of improved product quality. Law intervenes whenever competing firms get together to fix prices, rig bids, and allocate customers or make similar anticompetitive arrangements that are harmful to the consumers and society. 

Federal Antitrust laws and the acts they prohibit.

There are three main antitrust laws in the United States including the Sherman Act, the Clayton Act, and the Federal Trade Commission Act. They are dealt with in detail below:

  • Sherman Act : 

The Sherman Antitrust Act of 1890 is a Federal Statute prohibiting activities that restrict interstate commerce and marketplace competition. Since 1890, the Sherman Antitrust Act has stood as the main law that expresses America’s commitment to a free-market economy in which competition free from private and governmental constraints generates the best results for the American consumers. The Sherman Act outlaws all contracts, conspiracies, and combinations that can unreasonably restrain interstate and foreign trade. It also includes agreements among competitors related to bid-rigging, price-fixing, and customer allocation. 

According to the Sherman Act, it is also illegal to monopolize any part of interstate commerce. An unlawful monopoly exists in a situation where a single firm controls the market and the firm has obtained that market power not through a superior product or service but through anticompetitive practices or by suppressing competition. However, if a firm is performing better than its less efficient competitors only because the firm is competitive and sells at lower prices. Law treats violations of the Sherman Act that involve an agreement between competitors as criminal felonies. The Department of Justice has the power to bring criminal prosecutions under the Sherman Act. The individuals who have violated the Sherman Act are fined up to $1 million and can also be sentenced for up to ten years in the Federal Prison for each of their offenses. Corporations can also be fined up to $100 million for each of their offenses. In some cases, the maximum fines can be higher than the maximum limit in the Sherman Act or twice the gains or losses involved in the dealing.  

  • The Clayton Act:

The Clayton Act was passed in 1914. It is a Civil Statute carrying no criminal penalties and underwent a significant amendment in 1950. The Clayton Act prohibits any mergers or acquisitions that are likely to reduce the level of competition in the market. Under the Claton act, the government can challenge those mergers that are likely to increase the prices for the consumers. If an organization is considering a merger or acquisition above a certain size, all the persons involved must notify the Antitrust Division as well as the Federal Trade Commission. Apart from these, the Act also makes some other business practices illegal that can harm competition under certain circumstances.

“ The Federal Trade Commission is charged under Sections 3, 7, and 8 of the Clayton Act with preventing and eliminating unlawful tying contracts, corporate mergers and acquisitions, and interlocking directorates. This Act was amended by the Robinson-Patman Act, Pub. L. No. 74-692, 49 Stat. 1526, codified at 15 U.S.C. §§ 13, 13b, and 21a, under which the Commission is authorized to prevent certain practices involving discriminatory pricing and product promotion.”

Clayton Act, FTC.
  • The Federal Trade Commission Act:

The Federal Trade Commission Act of 1914 was signed into law on September 26, 1914 by President Woodrow Wilson. It makes unfair methods of competition in interstate trade illegal  but carries no criminal penalties. The Federal Trade Commission that polices the violations of the avct also came into existence with the Federal Trade Commission Act.  

Apart from these laws the Department of Justice also uses several more laws to fight illegal activities in commerce. There are laws that prohibit false statements to federal agencies, perjury, obstruction to justice as well as conspiracies to defraud the uNited States or mail and wire fraud. The federal Trade Commission Act and the Clayton Act have been amended several times since their formation to expand the legal responsibilities as well as the authority of the Federal Trade Commission. Here are the most significant amendments to the Federal Trade Commission Act and the Clayton Act:

  • Webb-Pomerene Export Trade Act of 1918 – This Act encouraged cooperative activities in exports. It gave the commission the responsibility of receiving certain filings from export associations organized under the Act. Apart from that, the act gave the commission the responsibility to investigate the operations of Export Trade Associations for actions that might have an adverse impact on competition in the United States.  Under this Act, the FTC can also make recommendations to the export trade associations to make business readjustments that may be necessary to comply with the law as well as make recommendations as appropriate not the attorney general for law enforcement action.
  • Robinson- Patman Act of 1936: This act was meant to support the Clayton Act. It addressed the pricing strategies of suppliers and wholesalers. 
  • Wool Products Labelling Act of 1939: The main aim of this act was to ensure the purity of wool products.
  • Lanham Trade Act of 1946: The Lanham Act or the Trademark Act of 1946 as it is also known, is the federal statute governing trademarks, service marks, and unfair competition. Congress passed this act on July 05, 1946, when President Harry Truman signed it into law. 
  • Fair Packaging and Labelling Act of 1966: This Act made unfair or deceptive labeling or packaging illegal. 
  • Truth in Lending Act of 1969: This act grew the protection consumers had in terms of credit card loans. It made it mandatory for the companies to offer full disclosure of credit terms and limited consumer liability concerning stolen credit cards. The act also established regulations regarding the advertising of credit services. 
  • Fair Credit Reporting Act of 1970: The Fair Credit Reporting Act of 1970 or the FCRA is a Federal Law regulating the collection of consumer credit information as well as access to consumers’ credit reports by the credit reporting agencies. Passed in 1970, the main aim of this act was to address the fairness, accuracy, and privacy of the personal information included in the credit reports of consumers.

Some more acts that amended the Clayton Act and the Federal Trade Commission act included the FTC FRanchise rule of 1979, Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, Children’s Online Privacy Protection Act of 1998,  Do Not Call Registry Act of 2003 as well as Fair and Accurate Credit Transactions Act of 2003.

How are the antitrust laws enforced?

The federal antitrust laws are enforced in three main ways:

  • Through the criminal and civil enforcement actions that the antitrust division of the Department of Justice brings.
  • Through the civil enforcement actions that the Federal Trade Commission brings.
  • Through the lawsuits that the private parties asserting damage claims bring.

The Department of Justice uses several tools to investigate and prosecute criminal antitrust violations. To find and accumulate evidence, the DoJ attorneys often work with the FBI and other investigative agencies.  The DoJ also uses court-authorized searches of businesses in some cases as well as secret reports of telephone calls and meetings provided by informants. In some cases, the Department of Justice can also provide immunity to individuals or corporations from prosecution if they provide timely information required for prosecuting others in cases of antitrust violations. There is a provision in the Clayton Act that also allows the private parties injured in an antitrust violation to sue the perpetrator in a Federal court for thrice their amount of damage as well as the court costs and attorney fees. Most states in the United States also have antitrust laws that are alike the Federal Antitrust Laws. The State laws apply generally to the violations taking place in one state only. It is mainly through the offices of the State Attorneys general that these laws are enforced. 

How do the antitrust violators cheat the consumers?

The worst antitrust violations are cartel violations like price-fixing, bid-rigging, and customer allocation. 

Price fixing:

When two competitors agree on fixing prices or they together set the prices to charge and agree that they would not sell below a certain price, then this practice is called price-fixing.

Bid rigging:

It is the practice of two or more firms agreeing to bid in a  way that the designated firm submits the winning bid (generally in the case of local, state, or federal government contacts).

Customer allocation:

This is a type of arrangement between competing firms to split up customers such as on a geographical basis in order to reduce or completely eliminate competition. 

These practices including price-fixing, bid-rigging, and customer allocation do not have any reasonable offsetting benefits for the consumers. The participating firms generally keep these agreements secret and continue to pose as competitors before their customers in order to defraud them despite their agreement not to compete. Unfair practices like price-fixing, bid-rigging, and customer allocation harm the consumers and taxpayers by making them pay more for products and services as well as depriving them of the byproducts of true and fair competition. The violators mostly know that their conduct is unlawful. Apart from that, in many cases, it has been found that the prices of products and services can grow by at least ten percent or more due to such practices. They make the American consumers pay billions of extra dollars each year to the cartel members engaged in such fraudulent practices. However, these cartel members are actually stealing people’s hard-earned money.

How can someone know if the antitrust laws are being violated?

If someone knows or suspects that there is an individual or organization like a supplier, employer, or competitor violating the antitrust laws, he must report it to the authorities so that they can decide whether to investigate. Antitrust violations like price-fixing, bid-rigging, and customer allocation are most likely to occur when there is a small set of sellers active in the market. It becomes difficult to arrive upon such agreements when the number of sellers is too large or the market is populated by a large number of competing businesses.

However, you can also identify antitrust violations by signs including:

  • You come across evidence that shows two competing sellers who sell similar products have agreed to price their products in a certain way or to sell only a certain amount of their products, or only in a certain area, or to a small segment of customers only.
  • You come across evidence that shows that there have been major price changes involving more than one sellers of similar products of different brands, mainly if the price changes are of an equal amount and occur at around the same time.
  • You get to hear suspicious statements from a seller that shows that a certain seller only can sell to a specific customer or group of customers.
  • There are fewer competitors than normal submitting bids for a project.
  • There are competing sellers who submit identical bids. 
  • The same company has been submitting the lower bid for certain products in a particular area. 
  • Bidder seems to be winning bids on a fixed rotation like every third bid or every fourth bid.
  • The dollar difference between the winning bid and all the other bids is unusually large and unexplainable. 
  • The same bidder bids unusually large amounts on some bids than the others and there is no straightforward logic that could explain the difference.

However, these signs are not always proof that an antitrust violation has occurred. In order to ascertain that there has been an antitrust violation, more investigation needs to be carried out by trained lawyers and investigators. These signs can still signal collusion and reporting to the antitrust authorities would be a responsible step.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.