Approaches to Antitrust Policy

Antitrust policy refers to the actions the government takes to promote competition among firms in the economy. Antitrust policy includes challenging and breaking up existing firms with significant market power, preventing mergers that would increase monopoly power significantly, prohibiting price fixing, and limiting anti-competitive arrangements between firms and their suppliers.

Antitrust policy began in the United States just over 100 years ago in response to a massive wave of mergers and consolidations. Similar merger movements occurred in Europe at about the same time. These mergers were made possible by rapid innovations in transportation, communication and management techniques. Railroads and telegraph lines expanded across the country, allowing large firms to place manufacturing facilities and sales offices in many different population centers.

Trust (monopoly), corporate monopoly organized under the legal device of trusteeship for the purpose of eliminating competition in an area of business and of controlling the market for a product. Specifically, a trust was a particular technique developed in the late 19th century to consolidate firms and acquire control in a variety of industries. The widespread use and abuse of trusts during this period ultimately gave rise to a series of antitrust laws that continue to be in effect.

A trust is a legal arrangement in which the voting stock of different companies is brought together under the direction of a board of trustees, which then issues trust certificates in exchange for all the shares or a controlling number of shares of the individual companies. This arrangement permits the trustees to manage and direct a group of companies in a unified way, in effect, creating a single firm out of competing firms.

i) Antitrust policy, prohibiting anti-competitive conduct and preventing monopolistic structures, is the primary way that public policy limits abuses of market power by large firms. Thus, policy grew out of legislation like the Sherman Act (1890) and the Clayton Act (1994). The primary purpose of anti-trust is:
  • To prohibit anti-competitive activities (which include agreements to fix prices or divide up territories, price discrimination, and tie-in agreement) and,
  • To break up monopoly structures. In today’s legal theory, such structures are those that have excessive market power (a large share of the market) and also engage in anti-competitive acts.
ii) In addition to limiting the behavior of existing firms, anti-trust law prevents mergers that would lessen competition. Today, horizontal mergers (between firms in the same industry) are the main source of concern, while vertical conglomerate mergers tend to be tolerated.

iii) Anti-trust policy has been significantly influenced by economic thinking during the last two decades. As a result, anti-trust policy during the 1980s focused almost exclusively on improving efficiency, while it ignored earlier populist concerns with bigness itself. Moreover, in today’s economy with intense competition from foreign producers and in deregulated industries, many believe that anti-trust policy should concentrate primarily on preventing collusive agreements like price fixing.

There are two approaches of anti-trust policy. They are:

i) Market performance

Market performance refers to the rate of technological change, efficiency and profit of the industry, conduct of individual firms etc. according to the supporters of this approach to observe how far the concerned firms have served the economy while marking judgment on anti-trust cases, the performance of those firms should be reviewed in detail. If they have served the economy well, only due to their having large market share cannot be regarded as having violated anti-trust laws.

This test strongly relies on the technological progressiveness and ‘dynamism’ of the firms. It is difficult to say whether related performance of a particular firm is ‘good’ or ‘bad’ is the main problem of this approach.

ii) Market structure

The other approach to anti-trust policy is market structure. This approach gives emphasis on the market structure of the industry. Market structure means the number and size distribution of the buyers and the sellers in the market, ease of the entry of new firms, and the extent of the product differentiation. According to the supporters of this approach, market structure should be seen for the evidence of the undesirable monopolistic characteristic. It is considered as having ‘market power’. The market power cannot be protected by economies of scale of or any justifications it should be declared illegal. Here market power refers having monopoly power.

Though, this approach is also not far from the defect. The main defect of this approach is that the relationship between the market structure and the market performance may be very weak. It is socially unacceptable, because certain level of concentration is arbitrarily selected. There are two important acts, which are as follows:

Sherman Antitrust Act

Sherman Antitrust Act, basic federal enactment regulating the operations of corporate trusts, passed by the US Congress in July 1890, through the efforts of Senator John Sherman of Ohio. The act declared illegal “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” Criminal penalties were provided for violators of the law, and aggrieved persons were entitled to recover three times the amount of losses suffered as a result of violation. The Sherman Act has been amended and supplemented by several subsequent enactments.

Supreme Court Rules Standard Oil Company Is Illegal Trust items Sherman Antitrust Act, basic federal enactment regulating the operations of corporate trusts, passed by the US Congress in July 1890, through the efforts of Senator John Sherman of Ohio. The act declared illegal “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” Criminal penalties were provided for violators of the law, and aggrieved persons were entitled to recover three times the amount of losses suffered as a result of the violation. The Sherman Act has been amended and supplemented by several subsequent enactments. Most notable among these enactments was the Clayton Antitrust Act of 1914.

Clayton Antitrust

Clayton Antitrust Act, legislation passed by the United States Congress in 1914 to prohibit certain monopolistic practices that were then common in finance, industry, and trade. Sponsored by the Alabama congressman Henry De Lamar Clayton, the Clayton Antitrust Act was adopted as an amendment to the Sherman Antitrust Act. Designed to deal with new monopolistic practices, the act contained three distinct types of provisions, covering corporate activities, remedies for reform, and labor disputes.

The provisions relating to corporate activities declared illegal practices as local price-cutting to freeze out competitors, exclusive selling or leasing, and other forms of price discrimination. The law also forbade inter-corporate stock holdings that allow one firm to gain control over another, thereby lessening competition, and certain interlocking directorates, in which a few persons control an industry by serving simultaneously as directors of related corporations.

The act permitted individual suits for damages from discrimination or exclusive selling or leasing, and made directors or officers of corporations responsible for infractions of the antitrust laws. Appeals were directed to the Federal Trade Commission, which was, in part, created to enforce the antitrust provisions of the act and which was empowered to issue cease-and-desist orders when illegal activities had been proved.

The act also affirmed the right of unions to strike, boycott, and picket. Its provisions dealing specifically with labor matters limited use of the federal injunction in labor disputes; at the same time, unions were explicitly excluded from the restrictions of antitrust laws. Unfavorable court interpretations weakened the act, however, and additional legislation was required fully to carry out its aims.

Recently ambivalence has grown among lawyers, economists, and business executives with respect to the effectiveness of the nation’s antitrust laws. Some of this stems from the belief that the growth of multinational firms and worldwide competition makes concern about concentration in the domestic market less important. Other experts suggest that a vigilant antitrust stance is essential if price fixing and horizontal type mergers that reduce competition in certain industries are to be prevented.

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