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Chapter 46
Antitrust Law
INTRODUCTION
The basis of antitrust legislation is a desire to foster competition. Antitrust legislation was initially created, and
continues to be enforced, because of our belief that competition leads to lower prices, more product information, and
a better distribution of wealth between consumers and producers.
To curb anticompetitive or unfair business practices, the federal government passed the Sherman Antitrust
Act of 1890, the Clayton Act of 1914, the Federal Trade Commission Act of 1914, and other laws. This chapter
discusses these statutes, focusing primarily on the Sherman Act and the Clayton Act.
CHAPTER OUTLINE
I. The Sherman Antitrust Act
The Sherman Act is proscriptive rather than prescriptive. It is the basis for policing, rather than regulating,
business conduct.
A. MAJOR PROVISIONS OF THE SHERMAN ACT
Sections 1 and 2 contain the main provisions.
2 UNIT NINE: GOVERNMENT REGULATION
• Section 1—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, is hereby declared to be
illegal [and is a felony punishable by fine or imprisonment].
• Section 2—Every person who shall monopolize, or attempt to monopolize, or combine or conspire
with any other person or persons, to monopolize any part of the trade or commerce among the
several States, or with foreign nations, shall be deemed guilty of a felony [and is similarly pun-
ishable].
ADDITIONAL BACKGROUND—
Federal Antitrust Legislation
Despite condemning anticompetitive agreements on the basis of public policy, the common law proved to
be an ineffective means of protecting free competition. These shortcomings became acutely obvious during
the latter half of the 1800s as a concentrated group of powerful individuals began to acquire unrivaled market
power by combining competing firms under singular control.
After the Civil War ended, the nation renewed its drive westward. With the movement westward came the
expansion of the railroads and the further integration of the economy. The growth of national markets also
witnessed the efforts of a number of small companies to combine into large business organizations, many of
which gained considerable market power. These later type of organizations became known as trusts, the
most famous—or infamous—being John D. Rockefeller’s Standard Oil Trust. Participants transferred their
stock to a trustee for trust certificates. The trustee made decisions fixing prices, controlling production, and
determining the control of exclusive geographical markets for all trust members. As used by Standard Oil and
others around the turn of the century, a trust was a device used to amass market power. Members could
compete free from competition with other members. Also, a trust might wield such economic power that
companies outside the trust could not compete effectively.
In some cases, an entire industry was dominated by a single organization. The public perception was
that the trusts used their market power to drive small competitors out of business, leaving the trusts then free
to raise prices virtually at will. Many states attempted to control these consequences by enacting statutes
outlawing trusts (which is why all laws regulating economic competition today are referred to as antitrust
laws). Congress initially dealt with the railroad monopolies by attempting regulation rather than an outright
assault on monopoly power. The result was the Interstate Commerce Act of 1887.
Congress next attempted to deal with trusts in a direct, unified way by passing the Sherman Act in 1890.
The Sherman Act, however, failed to end public concerns over monopolies. The United States Supreme
Court initially construed the statute too narrowly to give it much effect and subsequently applied it so
rigorously as to make the act unworkable. Lackluster enforcement also contributed to the public’s
dissatisfaction. Concern over the trust problem continued to the point that it dominated the 1912 presidential
election, and eventually, in 1914, led to enactment of the Clayton Act and the Federal Trade Commission Act,
which proscribed specific acts and provided for more aggressive means of enforcement.
The Clayton Act (as amended by the Robinson-Patman Act in 1936 and the Celler-Kefauver Act of 1950)
addressed specific acts that are considered to be anticompetitive. The Federal Trade Commission Act
created the Federal Trade Commission and invested it with broad enforcement powers to prevent, as well as
correct, business behavior broadly defined as unfair trade practices.
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B. DIFFERENCES BETWEEN SECTION 1 AND SECTION 2
• Section 1 requires two or more persons; one person alone can violate Section 2.
• Section 1 cases are often concerned with agreements that restrain trade; Section 2 cases deal with
the structure of a monopoly.
• Both sections seek to curtail practices that result in undesired monopoly behavior, but Section 2
requires that a “threshold” or “necessary” amount of monopoly power already exist.
C. JURISDICTIONAL REQUIREMENTS
Any activity that substantially affects commerce falls under the act, which also extends to U.S. nationals
abroad who engage in activities that have an effect on U.S. foreign commerce.
ENHANCING YOUR LECTURE—
THE SHERMAN ANTITRUST ACT OF 1890
The author of the Sherman Antitrust Act of 1890, Senator John Sherman, was the brother of the famed
Civil War general William Tecumseh Sherman and a recognized financial authority. Sherman had been
concerned for years with the diminishing competition within U.S. industry and the emergence of monopolies,
such as the Standard Oil trust.
THE STANDARD OIL TRUST
By 1890, the Standard Oil trust had become the foremost petroleum refining and marketing combination
in the United States. Streamlined, integrated, and centrally and efficiently controlled, its monopoly over the
industry could not be disputed. Standard Oil controlled 90 percent of the U.S. market for refined petroleum
products, and small manufacturers were incapable of competing with such an industrial leviathan.
THE PASSAGE OF THE SHERMAN ANTITRUST ACT
The common law regarding trade regulation was not always consistent. Certainly, it was not very familiar
to the members of Congress. The public concern over large business integrations and trusts was familiar,
however. In 1888, 1889, and again in 1890, Senator Sherman introduced in Congress bills designed to
destroy the large combinations of capital that, he felt, were creating a lack of balance within the nation’s
4 UNIT NINE: GOVERNMENT REGULATION
economy. Sherman told Congress that the Sherman Act “does not announce a new principle of law, but
applies old and well-recognized principles of the common law.”a In 1890, the Fifty-first Congress enacted the
bill into law.
Generally, the act prohibits business combinations and conspiracies that restrain trade and commerce, as
well as certain monopolistic practices.
APPLICATION TO TODAY’S WORLD
II. Section 1 of the Sherman Act
Trade restraints fall into two categories: horizontal and vertical. Those that are blatantly anticompetitive are
per se violations; those that are not so blatant are analyzed under the rule of reason.
A. PER SE VIOLATIONS VERSUS THE RULE OF REASON
1. Rationale for the Rule of Reason
If the rule-of-reason had not developed, almost any business agreement could be held to violate the
Sherman Act.
2. Factors That Courts Consider
Factors that a court might consider in a rule-of-reason analysis include—
• The purpose of an arrangement.
• The powers of the parties.
• The effect of the parties’ actions.
• Whether a less restrictive means might have accomplished the same result.
B. HORIZONTAL RESTRAINTS
Horizontal restraints result from concerted action by direct competitors.
1. Price Fixing
An agreement among competitors to fix prices is unlawful per se.
a. The Reason Behind the Agreement Is Not a Defense
b. Price Fixing Cartels Today
Price-fixing cartels are common among U.S. companies and international corporations in
many industries.
2. Group Boycotts
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An agreement by two or more sellers to refuse to deal with, or boycott, a particular person or firm is
a group boycott, or joint refusal to deal, a per se violation.
3. Horizontal Market Division
It is a per se violation for competitors to divide up territories or customers.
4. Trade Associations
Generally, the rule of reason is applied to trade association actions. Like other anticompetitive
actions subject to the rule of reason, if a trade association practice that restrains trade benefits the
association and the public, it may be deemed reasonable.
ENHANCING YOUR LECTURE—
CAN REALTOR ASSOCIATIONS
LIMIT LISTINGS ON THEIR WEB SITES?
Like almost every other product, homes are now being sold via the Internet on hundreds of thousands of
Web sites. The most extensive listings of homes for sale, though, are found on the multiple listing services
(MLS) sites that are available for every locality in the United States. An MLS site is developed through a
cooperative agreement by real estate brokers in a particular market area to pool information about the
BOARDS OF REALTORS HAVE ATTEMPTED TO LIMIT LISTINGS ON THEIR WEB SITES.
In a given market area, the MLS listings are put together by the members of a local real estate
association, typically called a Board of Realtors®, for the members’ exclusive use. In many areas, Boards of
Realtors® have attempted to restrict the homes that can be listed on the official MLS Web site. In particular,
the boards have tried to prevent discount brokers from listings the homes they have for sale.
THE NAR TRIES TO RESTRICT VIRTUAL BROKERS.
The National Association of Realtors (NAR) represents more than 1 million individual member brokers
and their affiliated agents and sales associates. Its policies govern the conduct of its members throughout the
6 UNIT NINE: GOVERNMENT REGULATION
THE U.S. DEPARTMENT OF JUSTICE ENTERS THE FRAY.
The Antitrust Division of the U.S. Department of Justice, however, contended that the opt-out policy was
anticompetitive and harmful to consumers. When the Justice Department indicated that it would bring an
antitrust action against the NAR, the association modified its policy and eliminated the selective opt-out
provision aimed specifically at VOW-operating brokers. Nevertheless, the revised policy still allowed brokers
to prevent their listings from being displayed on any competitor’s Web site. Thus, under the new policy,
traditional brokers could still prevent VOW-operating brokers from providing the same MLS information via the
FOR CRITICAL ANALYSIS
Why couldn’t discount brokers simply create their own Web sites to list the houses they have for
sale?
5. Joint Ventures
Generally, the rule of reason applies (unless price fixing or market divisions are involved).
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The text explains that vertical restraints arise from agreements between firms at different levels in the
distribution process. Some are per se violations; some are judged under the rule of reason.
1. Territorial or Customer Restrictions
To insulate dealers from direct competition with other dealers selling a manufacturer’s product, the
manufacturer may institute territorial restrictions or attempt to ban wholesalers or retailers from
reselling the product to certain classes of buyers.
8 UNIT NINE: GOVERNMENT REGULATION
a. May Have Legitimate Purpose
A manufacturer may want dealers to share marketing and service costs proportionately, for
example, instead of competing against each other to cut those costs.
b. Judged under Rule of Reason
These restrictions are judged under the rule of reason.
2. Resale Price Maintenance Agreements
A resale price maintenance agreement, in which a manufacturer tells a retailer at what price the
retailer can sell the manufacturer’s products, is considered subject to the rule of reason.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Resale Price Maintenance Agreements
Cases considering resale price maintenance agreements include the following.
• Ozark Heartland Electronics, Inc. v. Radio Shack, A Division of Tandy Corp., 278 F.3d 759 (8th Cir. 2002)
(there is no violation of the antitrust laws, which proscribe unreasonable price maintenance agreements, if the
III. Section 2 of the Sherman Act
Section 2 proscribes monopolization and attempts to monopolize. A tactic that may be involved in either
offense is predatory pricing—pricing below the cost of production to drive competitors out of business. The
surviving firm can then price its products at high enough levels to earn monopoly profits.
ADDITIONAL BACKGROUND—
Predatory Pricing
Predatory pricing refers to the systematic underpricing by a firm of its products—sometimes at levels
below the costs of producing those products—to wrest sales from competitors operating in the same market
and, over time, drive those competitors out of business. Once the competitors have been eliminated, the
surviving firm can then price its products at high enough levels so that it can earn monopoly profits. In any
event, predatory pricing is widely regarded as a practice that accompanies the intent by a company to
monopolize unlawfully a product market.
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ADDITIONAL BACKGROUND—
State Predatory-Pricing Laws
All fifty states have adopted their own antitrust laws, many of which are nearly identical federal antitrust
statutes. For this reason, state courts often rely on the decisions of federal courts in interpreting and applying
state antitrust laws. State courts vary in their interpretations, however, when there is a difference between
federal and state statutes or policy. The following is a state predatory-pricing statute that is similar to those
in about half of the states.
ARKANSAS CODE OF 1987 ANNOTATED
TITLE 4. BUSINESS AND COMMERCIAL LAW
SUBTITLE 6. BUSINESS PRACTICES
CHAPTER 75. UNFAIR PRACTICES
SUBCHAPTER 2. UNFAIR PRACTICES ACT
4-75-201 Title.
This subchapter shall be known and designated as the “Unfair Practices Act”.
4-75-202 Purpose.
The General Assembly declares that the purpose of this subchapter is to safeguard the public against the
creation or perpetuation of monopolies and to foster and encourage competition by prohibiting unfair and
discriminatory practices by which fair and honest competition is destroyed or prevented.
4-75-203 Construction.
This subchapter shall be literally construed so that its beneficial purposes may be subserved.
4-75-204 Penalties.
Any person, firm, or corporation, whether as principal, agent, officer, or director, for himself, or itself, or for
10 UNIT NINE: GOVERNMENT REGULATION
another person, or for any firm or corporation, or any corporation who or which shall violate any of the
provisions of this subchapter is guilty of a misdemeanor for each single violation and upon conviction shall be
punished by a fine of not less than one hundred dollars ($100) nor more than one thousand dollars ($1,000)
or by imprisonment not exceeding six (6) months, or by both a fine and imprisonment in the discretion of the
court.
4-75-205 Forfeiture of charter, rights, etc. -- Proceedings.
(a) Upon the third violation of any of the provisions of this subchapter by any corporation, it shall be the duty
of the Attorney General to institute proper suits or quo warranto proceedings in any court of competent
4-75-206 Contracts violating subchapter illegal.
Any contract, express or implied, made by any person, firm, or corporation in violation of any of the
provisions of this subchapter is declared to be an illegal contract and no recovery thereon shall be had.
4-75-207 Destruction of competition by price discrimination prohibited.
(a) It shall be unlawful for any person, firm, or corporation doing business in the State of Arkansas and
engaged in the production, manufacture, distribution, or sale of any commodity or product or of service or
output of a service trade of general use or consumption or of the product or service of any public utility with
(b) The inhibition of this section against locality discrimination shall include any scheme of special rebates,
4-75-208 Secret payments or allowance of rebates, refunds, etc. -- Penalty.
(a) The secret payment or allowance of rebates, refunds, commissions, or unearned discounts, whether in
(b) Any person, firm, partnership, corporation, or association resorting to such trade practice shall be
CHAPTER 46: ANTITRUST LAW 11
4-75-209 Sale at less than cost or with intent to injure competitors.
(a)(1) It shall be unlawful for any person, partnership, firm, corporation, joint-stock company, or other
association engaged in business within this state, to sell, offer for sale, or advertise for sale any article or
(2) Any person or entity so doing shall be guilty of a misdemeanor, and on conviction shall be subject to the
(b)(1) The term “cost” as applied to production is defined as including the cost of raw materials, labor, and all
overhead expenses of the producer; and, as applied to the distribution, “cost” shall mean the invoice or
(2) The “cost of doing business” or “overhead expense” is defined as all costs of doing business incurred in
(c) In establishing the cost of a given article or product to the distributor and vendor, the invoice cost of the
article or product purchased at a forced, bankrupt, closeout sale, or other sale outside of the ordinary
(1) The article or product is kept separate from goods purchased in the ordinary channels of trade; and
(2) The article or product is advertised and sold as merchandise purchased at a forced, bankrupt, or closeout
(d) In any injunction proceeding or in the prosecution of any person as officer, director, or agent, it shall be
(e) Where a particular trade or industry of which the person, firm, or corporation complained against is a
(1) In closing out in good faith the owner’s stock or any part thereof for the purpose of discontinuing his trade
CHAPTER 46: ANTITRUST LAW 13
thereof;
4-75-210 Liability of directors, officers, agents, etc. -- Proof of unlawful intent.
(a) Any person who, either as director, officer, or agent of any firm or corporation or as agent of any person
4-75-211 Remedies -- Witnesses and documents -- Immunity.
(a) Any person, firm, private corporation, or municipal or other public corporation, or trade association, may
(3) However, no information so obtained may be used against the defendant as a basis for a misdemeanor
14 UNIT NINE: GOVERNMENT REGULATION
A. MONOPOLIZATION
There are two elements to a Section 2 violation—
• Possession of monopoly power in the relevant market.
• Willful acquisition or maintenance of that power.
1. Defining Monopoly Power
Monopoly refers to control by a single entity. If a firm has sufficient market power to affect prices
and output, it may be a monopoly even though it is not the sole seller in the market. To define a
firm’s market power, courts look to its share of the relevant market.
2. Proving Monopoly Power
• Monopoly power may be proved by direct evidence that a firm used its market power to control
prices or exclude competition.
• To prove monopoly power indirectly, a firm may be shown to have a dominant share of the
relevant market. Courts also consider the barriers for competitors to enter that market.
ADDITIONAL BACKGROUND—
A Monopolist Charging Lower Prices?
The courts do not view the Sherman Act as protection for competitors from competitive practices.
Instead, the courts see the act as protection for consumers from monopolistic practices. The monopolistic
3. Relevant Market
To define a firm’s market power, courts look to its share of the relevant market, consisting of—
• A relevant product market.
• A relevant geographic market.
a. Relevant Product Market
In determining the relevant product market, the key issue is the degree of products’ in-
terchangeability. Decisions on this issue can often be interpreted as arbitrary.
CASE SYNOPSIS—
Case 46.1: McWane, Inc. v. Federal Trade Commission
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McWane, Inc., is the dominant producer of domestic ductile iron pipefittings. When Star Pipe Products
entered the market, McWane told its distributors that unless they bought all of their domestic fittings from
..................................................................................................................................................
Notes and Questions
How might the imposition of McWane’s exclusive-dealing policy benefit consumers? McWane’s
policy may have affected competition in its market, but its market consisted chiefly, if not entirely, of
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Monopolization
Cases including claims of monopolization include the following.
• PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101 (2d Cir. 2002) (in a cola syrup manufacturer’s suit against a
competitor, alleging in part monopolization based on the defendant’s distributorship agreements with
