by Many countries have broad laws that protect consumers and regulate how companies operate their businesses. The goal of these laws is to provide an equal playing field for similar businesses that operate in a specific industry while preventing them from gaining too much power over their competition. Simply put, they stop businesses from playing dirty in order to make a profit. These are called antitrust laws.
In the United States, antitrust law is a collection of federal and state government laws that regulate the conduct and organization of business corporations and are generally intended to promote competition and prevent monopolies. The main statutes are the Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914. These Acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.
Federal antitrust laws provide for both civil and criminal enforcement of antitrust laws. The Federal Trade Commission, the Antitrust Division of the U.S. Department of Justice, and private parties who are sufficiently affected may all bring civil actions in the courts to enforce the antitrust laws. However, criminal antitrust enforcement is done only by the Justice Department. U.S. states also have antitrust statutes that govern commerce occurring solely within their state borders.
The scope of antitrust laws, and the degree to which they should interfere in an enterprise’s freedom to conduct business, or to protect smaller businesses, communities and consumers, are strongly debated. Some economists argue that antitrust laws, in effect, impede competition, and discourage businesses from activities that would be beneficial to society. One view suggests that antitrust laws should focus solely on the benefits to consumers and overall efficiency, while a broad range of legal and economic theory sees the role of antitrust laws as also controlling economic power in the public interest. A survey of 568 member economists of the American Economic Association (AEA) in 2011 found a near-universal consensus, in that 87 percent of respondents broadly agreed with the statement “Antitrust laws should be enforced vigorously.”
Monopolies
Usually, when most people hear the term “antitrust” they think of monopolies. Monopolies refer to the dominance of an industry or sector by one company or firm while cutting out the competition.
One of the most well-known antitrust cases in recent memory involved Microsoft, which was found guilty of anti-competitive, monopolizing actions by forcing its own web browsers upon computers that had installed the Windows operating system.
Regulators must also ensure monopolies are not borne out of a naturally competitive environment and gained market share simply through business acumen and innovation. It’s only acquiring market share through exclusionary or predatory practices that is illegal.
Tying the Sale of Two Products: When a monopolist has dominance in the market shares of one product but wishes to gain market shares in another product, it can tie sales of the dominant product to the second product. This forces customers for the second product to buy something they may not need or want and is a violation of antitrust laws.
Exclusive Supply Agreements: These occur when a supplier is prevented from selling to different buyers. This stifles competition against the monopolist as the company will be able to buy supplies at potentially lower costs and prevent competitors from manufacturing similar products.
Predatory Pricing: Often hard to prove, and requiring a careful examination on the part of the FTC, predatory pricing can be considered monopolistic if the price cutting firm can cut prices far into the future and has enough market share to recoup its losses down the line.
Refusal to Deal: Like any other company, monopolies can choose who they wish to conduct business with. However, if they use their market dominance to prevent competition, this can be considered a violation of antitrust laws.
Price Fixing
Price fixing occurs when the price of a product or service is set by a business intentionally rather than letting market forces determine it naturally. Several businesses may come together to fix prices to ensure profitability.
Say my company and yours are the only two companies in our industry, and our products are so similar that the consumer is indifferent between the two except for the price. In order to avoid a price war, we sell our products at the same price to maintain margin, resulting in higher costs than the consumer would otherwise pay.
Bid Rigging
The illegal practice between two or more parties who collude to choose who will win a contract is called bid rigging. When making bids, the “losing” parties will purposely make lower bids in order to allow the “winner” to succeed in securing the deal. This practice is a felony in the U.S. and comes with fines even jail time.
There are three companies in an industry, and all three decide to quietly operate as a cartel. Company 1 will win the current auction, so long as it allows Company 2 to win the next and Company 3 to win the one after that. Each company plays this game so they all retain current market share and price, thereby preventing competition.
Bid rigging can be further divided into the following forms: bid suppression, complementary bidding, and bid rotation.
Complementary Bidding: Also known as cover or courtesy bidding, complementary bidding happens when competitors collude to submit unacceptably high bids for the buyer or include special provisions in the bid that effectively nullify the bids. Complementary bids are the most frequent of bid-rigging schemes and are designed to defraud purchasers by creating the illusion of a genuinely competitive bidding environment.
Bid Suppression: Competitors refrain from bidding or withdraw a bid so a designated winner’s bid is accepted.
Bid Rotation: In bid rotations, competitors take turns being the lowest bidder on a variety of contract specifications, such as contract sizes and volumes. Strict bid rotation patterns violate the law of chance and signal the presence of collusion activity.
Market Allocation
Market allocation is a scheme devised by two entities to keep their business activities to specific geographic territories or types of customers. This scheme can also be called a regional monopoly.
Suppose my company operates in the Northeast and your company does business in the Southwest. If you agree to stay out of my territory, I won’t enter yours, and because the costs of doing business are so high that startups have no chance of competing, we both have a de facto monopoly.
