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Antitrust Law

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Economics

If we're playing a game, can you be trusted to follow the rules and not play dirty? If you said no, you might have more in common with monopolistic companies than you realize. They too like to play dirty and do whatever they can to win, even if that means breaking the rules. Those who want to go against them end up failing and are usually not heard from again. At least as far as the market is concerned. That's why antitrust laws were created. To learn more about antitrust laws, what they protect against, the history and more, continue reading below!

Antitrust Laws: Definition

There are of course many rules in place to protect consumers and to manage the way that companies run their businesses. The point behind these rules is to allow everyone a fair chance when it comes to similar businesses competing and to stop companies from playing dirty just to make more money and destroy the competition. These rules or laws are known as antitrust laws. Without them, consumers like you wouldn't have many options when it came to buying something and you'd most likely have to pay higher prices for the things you want. That's why governments use these laws in order to encourage more competition within markets.

Antitrust laws are laws that protect consumers from businesses that are trying to take advantage of them and allow all similar businesses a fair chance to represent themselves and grow.

Antitrust Law Advantages

The whole point behind these laws is to ensure that there will be healthy competition between different companies. If the sellers are constantly competing with each other, they'll be so busy providing excellent service and better deals to consumers that they will not have time to take advantage of the consumers. They know if they do so, that the consumer will end up turning their back on them and taking their business elsewhere.

Essentially, these laws ensure that companies will always do their best to improve their goods/services and to try their best to remain in their customers' good graces! You as a consumer benefit, as do well-run companies. The companies that are not run well and instead engage in unfair business practices tend to go under.

Antitrust laws Protection and Importance

Antitrust laws, also known as competition laws, are what stand in between monopolies and an even playing field. They protect against a variety of shady business activities such as market allocation, monopolies, price-fixing, and bid-rigging.

Market allocation

Market allocation is a practice usually enacted by two business owners in order to have their business reign over certain territory or "call dibs" on certain types of customers. You may have heard of this being called a regional monopoly before.

Imagine you and your friend are both business owners. You are both in the same type of business and make an agreement as to how far your businesses can stretch before you enter into one another's territory. You say business in the east side of the state is yours and they state that the west side of the state is theirs. Due to this plus the costs of starting a company being extremely high, you have now ensured that other companies and especially startups have no chance of competing with you or your friend. You both have created a regional monopoly.

Monopolies

If you've ever played the board game then you're familiar with what a monopoly is. A monopoly refers to when a specific company completely cuts out its competition and completely dominates a certain industry.

Antitrust Law Policy Monopoly StudysmarterMonopoly, Source: Pixabay

As the illustration above shows, the company owner seems to keep making profit after profit in a monopoly. This is due to the fact that they have pushed out anyone else who is seen as competition and now that the company owner is the sole supplier of a particular good/service. Since there is no competition, consumers have no choice but to purchase from the owner of the monopoly. This is not to say that all businesses that happen to dominate a certain industry are doing something illegal. Some may have earned their spot fair and square. However, there are illegal practices that people take advantage of in order to create a monopoly. Some of these illegal practices are:

  • Refusing to deal - of course, everyone can choose who they want to do business with, but if a dominating company uses its power in order to prevent competition, then this becomes problematic.
  • Predatory pricing - this is when companies lower their prices to the point that it becomes impossible for any competitor to remain in the game. Usually, once the competition is defeated, the price goes back up.
  • Exclusive supply contracts - when two parties sign a contract that prevents one party (the supplier) from being able to sell to other buyers, this could be grounds for legal action.

A monopoly is when a company completely dominates a certain industry and cuts out practically all competition

To learn more about this topic, check out our explanation - Monopoly

Price-fixing

When competing companies get together and make a decision to set the price of a good they're selling to a similar price range instead of allowing the market forces to naturally set the price, this is known as price-fixing. Instead of competing with one another price-wise and trying to get customers to buy from them, they instead "fix" the price to avoid competing at all. By doing this they are not only increasing their profits, but they are also causing issues with regular supply and demand as well as limiting the options that consumers have.

If you're in the market for a new phone and you found one that you like, you want to see if certain companies are offering better deals on the phone. Company A and Company B are both selling the same phone with the same accessories included. They have also taken part in price-fixing so the price of the phones is the same as well. As a consumer, it doesn't matter which company you buy from because you're not getting a better deal from one or the other. Since their prices are the same, you also have no choice but to pay the price that they have come up with and are selling the phone for, even if it's a higher price than you'd otherwise pay.

Bid-rigging

This illegal game is played by two or more parties who come together to make an agreement as to who will win which contract. When bidding begins, there will be a "losing" party who keeps bidding low numbers on purpose so as to allow the other party to win. They do this so that the parties involved all get a profit and prevent other competition from securing any deals.

Company A, Company B, and Company C are all within the same industry. Before they head to an auction, they make a deal that Company A should win the first round, Company B the second round, and Company C the third round. In the end, all three walk out with good deals, and the competition is left with nothing.

The Three major Antitrust Laws that Exist

In the United States, there are three main antitrust laws in existence that make up the heart of the antitrust legislation:

  • The Sherman Antitrust Act - to prevent monopolization and attempts at monopolization
  • The Clayton Antitrust Act - an extension of the Sherman Antitrust Act; prevents mergers that may create monopolies and prevents price fixing
  • The Federal Trade Commissions Act - to prevent unfair competition strategies

History of Antitrust Laws

Antitrust laws began to get support back in the late 1800s. Due to businesses growing rapidly, people began to worry that businesses might end up having too much control and power. The people thought that if a king or queen could have too much power, then the same could be said of businesses.

The first actual piece of legislation regarding antitrust was called the Interstate Commerce Act of 1887. However, the legislation that actually caught the most attention and remains to this day one of the major antitrust laws is the Sherman Antitrust Act of 1890. Then in 1914, both the Clayton Antitrust Act and the Federal Trade Commissions Act were created. The Federal Trade Commissions Act established the Federal Trade Commission, which is an agency that is responsible for enforcing the federal antitrust laws.

Did you know that some U.S. presidents have brought lawsuits against companies for violating the antitrust laws? For example, President Ronald Reagan filed a lawsuit against AT&T because he suspected they were in violation of the Sherman Antitrust Act. In the end, AT&T had to be broken up into multiple smaller companies!

Examples of Antitrust Laws

One of the most well-known antitrust cases would be Rockefeller's Standard Oil Company v. United States. The courts agreed that the methods that were being used were unfair practices and were used to help build a monopoly. The courts also agreed that threats were made against other competitors so that they would be forced out of the market. Therefore as a penalty, the company was broken into smaller businesses that are still in business today.

The US Supreme Court ruled that while everyday practices of the company aren't necessarily in violation of any laws, the activities themselves were used to restrict trade and were causing the beginnings of a monopoly that is against the law.

Antitrust Policy - Key Takeaways

  • Antitrust laws are laws that protect consumers from businesses that are trying to take advantage of them and allow all similar businesses a fair chance to represent themselves and grow.
  • Governments use antitrust laws in order to encourage more competition within markets.
  • Antitrust laws protect against a variety of shady business activities such as market allocation, monopolies, price-fixing, and bid-rigging.
  • The three major antitrust laws are: The Sherman Antitrust Act, The Clayton Antitrust Act, and the Federal Trade Commissions Act.
  • Antitrust laws first gained support in the late 1800s.
  • The first actual piece of legislation regarding antitrust was called the Interstate Commerce Act of 1887.
  • One of the most well-known antitrust cases would be Rockefeller's Standard Oil Company v. United States.

Antitrust Law

Antitrust laws are laws that protect consumers from businesses that are trying to take advantage of them and allow all similar businesses a fair chance to represent themselves and grow.

They protect against a variety of shady business activities such as market allocation, monopolies, price-fixing, and bid-rigging.

The first piece was established in 1887. It was known as the Interstate Commerce Act. 

It's important because it stands in between monopolies and an even playing field for all. 

The three major antitrust laws are: The Sherman Antitrust Act, The Clayton Antitrust Act, and the Federal Trade Commissions Act. 

Final Antitrust Law Quiz

Question

What are antitrust laws?

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Answer

Antitrust laws are laws that protect consumers from businesses that are trying to take advantage of them and allow all similar businesses a fair chance to represent themselves and grow.

Show question

Question

What is the purpose of antitrust laws?

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Answer

The whole point behind these laws is to ensure that there will be healthy competition between different companies and not monopolies being created through illegal practices. 

Show question

Question

What do antitrust laws protect against?

Show answer

Answer

They protect against shady business activities such as market allocation, monopolies, price-fixing, and bid-rigging.

Show question

Question

What's a monopoly?


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Answer

A monopoly is when a company completely dominates a certain industry and cuts out practically all competition, mainly through illegal actions.

Show question

Question

What are the three major antitrust laws?

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Answer

The three major antitrust laws are: The Sherman Antitrust Act, The Clayton Antitrust Act, and the Federal Trade Commissions Act. 

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Question

Which of the following was the first antitrust legislation?

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Answer

Interstate Commerce Act

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Question

When did antitrust laws first gain support?

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Answer

They first started to gain support in the late 1800s. 

Show question

Question

One of the most well-known antitrust cases was...?

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Answer

Rockefeller's Standard Oil Company v. United States.

Show question

Question

What would happen if there weren't antitrust laws in place?

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Answer

Without them, consumers like you wouldn't have many options when it came to buying something and you'd most likely have to pay higher prices for the things you want.

Show question

Question

Who ends up losing out when antitrust laws are in effect?

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Answer

Poorly-run companies who rely on tricking customers or engaging in unfair business practices in order to secure deals end up losing out. 

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Question

What is price-fixing?

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Answer

When competing companies get together and make a decision to set the price of a good they're selling to a similar price range instead of allowing the market forces to naturally set the price.

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Question

Which of the following doesn't happen when companies take part in price-fixing?

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Answer

The # of options that consumers have increases

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Question

What's bid-rigging?

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Answer

This is when two or more parties come together to make an agreement as to who will win which contract. When bidding begins, there will be a "losing" party who keeps bidding low numbers on purpose so as to allow the other party to win.

Show question

Question

What is the Federal Trade Commission responsible for?

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Answer

It is responsible for enforcing the federal antitrust laws. 

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Question

What's an advantage to having antitrust laws in place?

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Answer

An advantage is that if the sellers are constantly competing with each other, they'll be so busy providing excellent service and better deals to consumers that they will not have time to take advantage of the consumers

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