Sherman Antitrust Act

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Federal legislation passed in 1890 prohibiting "monopolies or attempts to monopolize" and "contracts, combinations, or conspiracies in restraint of trade" in interstate and foreign commerce. The major purpose of the Sherman Antitrust Act was to prohibit monopolies and sustain competition so as to protect companies from each other and to protect consumers from unfair business practices. The act was supplemented by the clayton antitrust act in 1914. Both acts are enforced by the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Attorney General's office.

1890 law prohibiting monopolies and restraint of trade in interstate commerce. The Sherman Act was strengthened in 1914 with amendments known as the Clayton Act that added further prohibitions against price-fixing conspiracies. These federal antitrust laws at first were not applied to the insurance industry because of the 1869 Supreme Court ruling in Paul v. Virginia that insurance was not commerce and thus not subject to federal regulation. After the South-Eastern Underwriters Association (SEUA) Case in 1944 and passage of the Mccarran-Ferguson Act (Public Law 15) in 1945, Congress made it clear that states would retain the power to regulate insurance but price-fixing and restraint of trade not sanctioned by state laws and regulations would be subject to federal antitrust prosecution.

The oldest and most important federal antitrust law, the Sherman Antitrust Act has provided the primary statutory basis for American antitrust enforcement and case law since 1890. Like the other antitrust laws, the Sherman Act targets activities restricting marketplace competition. The act's sweeping prohibition of “[e]very contract, combination … or conspiracy” in restraint of interstate or foreign trade or commerce, set forth in its first section, addresses collusive or exclusionary group behavior. Section 2, prohibiting monopolization and attempted monopolization, primarily addresses single‐firm conduct, although it also condemns conspiracies to monopolize. Violations of the act currently are punishable by fines of up to $350,000 for individuals and up to $10 million for corporations, as well as by imprisonment of up to three years. Both the United States and private parties can seek federal court injunctions against threatened breaches of the act and are entitled to collect three times the amount of any injury they have sustained because of its violation. In addition, individual states are authorized to sue for treble damages on behalf of injured natural persons residing in the state.

The nearly unanimous congressional adoption of the act in 1890 responded to mounting public concerns generated by dramatic late nineteenth‐century increases in cartelization, consolidation, and apparent predatory business behavior. The congressional deliberations reflected traditional American concerns that anticompetitive conduct potentially imperils distributional fairness, productive efficiency, individual economic opportunity, and political liberty. Ever since 1890, however, scholars have disagreed with regard to specific congressional aims. Scholars, judges, and enforcement officials increasingly have posited an exclusive congressional desire to promote economic efficiency. A prominent alternative view has suggested that Congress primarily sought to prevent unfair wealth transfers resulting from noncompetitive pricing. These interpretations reflect a modern perception that the various economic, political, and moral goals reflected in the debates are in substantial tension. In late nineteenth‐century thinking, however, they largely were deemed to be complementary, so that most congressmen may well have sought to further all of these ends.

Rather than specifying the act's application in any detail, Congress left the task of further doctrinal development to the federal courts. Congress intended to incorporate in a general way the existing common‐law restraint of trade approaches of the state courts. The Sherman Act's enforcement provisions, however, went substantially beyond traditional common‐law doctrines that merely denied legal enforcement to restrictive agreements.

Despite the Supreme Court's initial limitation of the act's reach in United States v. E. C. Knight Co. (1895), the Court found for the government in a series of early cases culminating in its landmark decisions in *Standard Oil Co. v. United States (1911) and United States v. American Tobacco Co. (1911). The Court's ambiguous new embrace of a generalized *“rule of reason” standard for Sherman Act interpretation in those cases sparked new political debate and ultimately prompted Congress to pass the Clayton and Federal Trade Commission Acts in 1914 to supplement the Sherman Act.

World War I and the prosperous 1920s saw only limited Sherman Act enforcement. Federal antitrust enforcement activity dramatically expanded, however, in the later New Deal and since then has remained at a much higher level than at any time prior to the 1930s.

Over time, judicial interpretation of the act also has changed substantially. Sherman Act interpretation, scholarship, and enforcement have changed particularly dramatically since the middle 1970s. In recent cases, for example, the Court greatly has reduced, although not entirely eliminated, its use of “per se” rules to condemn summarily particular agreements among competitors or among firms in a supplier‐purchaser relationship. Simultaneously, the Court has given increasing weight to new economic perspectives suggesting that various collaborative arrangements beneficially may increase output and efficiency. The Supreme Court and lower courts similarly have shown growing tolerance for potentially efficient conduct that furthers the market position of dominant firms, even while continuing to condemn exclusionary behavior by such firms in the absence of such an efficiency justification.

Numerous special exceptions limit or preclude the normal application of the Sherman Act in particular circumstances. Some of the more important of these relate to labor activities, conduct within particular regulated industries, activities attributable to state rather than private decision making, and First Amendment protected activities.

See also Antitrust; Capitalism.

Bibliography

• E. Thomas Sullivan and Jeffrey L. Harrison, Understanding Antitrust and Its Economic Implications (1988)

— James May

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During the 1880s Americans worried about the emergence of trusts, or combinations of businesses that tended to reduce competition. Trusts occurred whenever a single board of trustees controlled the management of many different companies. By consolidating these companies, trusts could monopolize, or dominate, production and set prices in a particular industry. Newspapers and magazines accused the Standard Oil Trust, the Sugar Trust, and other large-scale industries of improperly suppressing competition. Defenders of the trusts asserted that such consolidation allowed more efficient production and lower prices. Opponents argued that a lack of competition placed consumers, small businesses, and farmers at the mercy of these monopolics, which could charge whatever prices they wanted.

In 1890 Congress responded to these public concerns by passing—almost unanimously—the Sherman Antitrust Act. Named for its chief sponsor, Senator John Sherman (Republican–Ohio), this act sought to end monopolies and make illegal any restriction on trade. However, the Sherman Act lacked any effective means of enforcement, and it failed to stop the growth of big business. During the 1890s the federal courts further weakened the Sherman Act by interpreting it to permit mergers and other forms of business consolidation. During the Progressive Era (1900–14), reformers continued the fight to “bust” the trusts. In 1914 Congress created the Federal Trade Commission in an effort to regulate business practices rather than try to abolish big business, as the Sherman Act had tried to do.

Sherman Antitrust Act was passed by Congress and signed into law by President Benjamin Harrison on 2 July 1890. Introduced and vigorously promoted by Senator John Sherman (R–Ohio), the law was designed to discourage "trusts," broadly understood as large industrial combinations that curtail competition. Its first section declares "every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade" to be illegal. The second section makes monopolistic behavior a felony subject to imprisonment ("not exceeding three years") and/or fines (not exceeding $10 million for corporations and $350,000 for private individuals). Civil actions may be brought by both the government and private parties. The act vests federal district courts with primary jurisdiction, and assigns the U.S. attorney general and "the several United States attorneys" chief enforcement authority.

Trusts were seemingly ubiquitous in the 1880s: thousands of businesses combined to control product pricing, distribution, and production. These associations were formed, among other reasons, to counter uncertainty created by rapid market change, such as uncoordinated advancements in transportation, manufacturing, and production. While many of these trusts were small in scale and managerially thin, the most notorious were controlled by industry giants such as Standard Oil, American Tobacco, and United States Steel. These large-scale, long-term trusts were seen as coercive and rapacious, dominating markets and eliminating competition.

The trust "problem" varied in the late nineteenth century, depending on who was describing it. For some, trusts perverted market forces and posed a threat to the nation's consumers—only big business gained from restricting free commerce and manipulating prices. (Some proponents of this view admitted, however, that the rise of the trusts corresponded with a general lowering of prices.) Popular journalists such as Henry Demarest Lloyd and Ida Tarbell stoked this distrust, arguing that trusts held back needed goods in order to make a profit under the ruse of overproduction. Others stressed the threat trusts posed to individual liberty by constricting citizens' ability to freely enter into trades and contracts. Many considered the threat to small businesses an assault on American values. Trusts were also seen as the cause of profound political problems. The money of men like Jay Gould and John D. Rockefeller was thought to corrupt politicians and democratic institutions, a view growing out of an American tradition equating concentrated power with tyranny and despotism. Fighting the trusts offered a way to combat new and pernicious versions of prerogative and corruption.

Prior to 1890, trusts were regulated exclusively at the state level, part of the general police power held by municipalities and states. States tackled the trust problem in various ways. Some attempted to eliminate collusion through the use of regulation; fifteen antitrust laws were passed between 1888 and 1891. More frequently they tried to limit business behavior without enacting legislation. State judges were receptive to arguments, raised by state attorneys general, that trusts violated long-standing legal principles; the common law provided a useful tool in battling "unreasonable" restraints of trade. However, several states, like New Jersey, Delaware, and New York, passed incorporation statutes allowing trusts and holding companies within their jurisdictions with the goal of attracting businesses.

Pressure to enact a federal antitrust law came from many quarters. Farmers and wage laborers, for example, saw industrialists as the major threat to their political and economic power; national control of trusts, under the banner of social justice, promised to increase their bargaining position. Small companies lobbied heavily for a federal antitrust law because they welcomed the chance to limit the power of their large competitors—competitors who disproportionately benefited from revolutions in distribution and production. Many were simply dissatisfied with state regulation, arguing that only the federal government could effectively control unfair business practices. Interestingly, evidence suggests that the trusts themselves were in favor of central regulation. They may have hoped a national law would discourage state antitrust activity, or, more cynically, serve as a useful distraction while they pursued more important goals. The New York Times of October 1890 called the Sherman Act a "humbug and a sham" that was "passed to deceive the people and to clear the way" for other laws, like a high protective tariff, that clearly benefited businesses.

When it was introduced, the Sherman Act raised serious objections in Congress. Like the Interstate Commerce Act of 1887, it was one of the first national laws designed to control private business behavior, and its legitimacy was uncertain. Concerns were allayed by three arguments. First, the law was needed: states were unable to fight trusts that operated outside their borders. Second, it was constitutional: antitrust activity was a legitimate exercise of Congress's authority to regulate interstate commerce. Finally, defenders argued that it did not threaten state sovereignty. The act, instead of preempting state antitrust activity, merely supplemented it.

Although the act passed by overwhelming margins in both the House (242–0) and Senate (52–1), many battles were fought between its introduction and final passage. The Senate Finance and Judiciary committees heavily revised the original bill, and both chambers added and withdrew numerous amendments. Senator Sherman, for example, supported an amendment exempting farm groups and labor unions from the law's reach, and Senator Nelson W. Aldrich (R–Rhode Island) proposed that the law not be applied to combinations that "lessen the cost of production" or reduce the price of the life's "necessaries." Some historians argue that the debate leading up to the Sherman Act reflected an ideological split between proponents of the traditional economic order and a new one. Congressmen divided sharply over the value of free competition in a rapidly industrializing society and, more generally, over the value of laissez-faire approaches to social and economic problems. Not surprisingly, the final language of the Sherman Act was broad, allowing a good deal of enforcement discretion.

The Sherman Act's effects on trusts were minimal for the first fifteen years after enactment. Indeed, large-scale monopolies grew rapidly during this period. There was no concerted drive to prosecute trusts, nor was there an agency charged to oversee industry behavior until a special division in the Justice Department was created in 1903 under President Theodore Roosevelt. (The Bureau of Corporations was formed the same year within the Department of Commerce and Labor to gather industry information.) "Trust busting," however, was not neglected during this period. States continued to pass antitrust laws after 1890, many far more aggressive than the federal version. More importantly, federal courts assumed a leader-ship role in interpreting the act's broad provisions, a role that they have never abandoned.

Supreme Court justices openly debated the act's meaning from 1890 to 1911, an era now known as the law's formative period. Two prominent justices, John Marshall Harlan and Chief Justice Melville W. Fuller, differed over the scope of federal power granted under the act, specifically, how much authority Congress has to regulate in-state business behavior. Fuller's insistence on clear lines of distinction between state power and federal power (or police powers and the commerce power) re-flected his strong attachment to dual federalism and informed decisions such as United States v. E. C. Knight Company (1895). For Fuller, manufacture itself is not a commercial activity and thus cannot be regulated under Congress's commerce power. According to this view, the federal government has no authority over things that have merely an "indirect" effect on commerce. Harlan's alternative position—that monopolistic behavior is pervasive, blurring distinctions between in-state and interstate activities—held sway in cases like Northern Securities Company v. United States (1904) and Swift and Company v. United States (1905). This understanding significantly broadened Congress's commerce power and was accepted conclusively by the Court in the 1920s under the stewardship of Chief Justice William Howard Taft in Stafford v. Wallace (1922) and Board of Trade of City of Chicago v. Olsen (1923).

In addition to disagreements over the reach of federal power, the justices differed over the intent of the act itself, namely what types of trade restraints were forbidden. The Court concluded that the section 1 prohibition against "every" contract and combination in restraint of trade was a rule that must admit of exceptions. Justices advocated prohibitions by type (the per se rule) and a more flexible, case-by-case analysis. A compromise was reached in Standard Oil Company of New Jersey v. United States (1911) known as the "rule of reason": the Sherman Act only prohibits trade restraints that the judges deem unreasonable. Some anticompetitive activity is acceptable, according to the rule. The harm of collusion may be outweighed by its pro-competitive ramifications.

The rule of reason may have solved an internal debate among the justices, but it did little to eliminate the ambiguity of federal antitrust enforcement. Indeed, internal Court debate before 1912 convinced many observers that the act invited too much judicial discretion. Proposals to toughen the law were prevalent during the Progressive Era and were a central feature of the presidential contest of 1912. The Clayton Antitrust Act of 1914 clarified the ambiguities of the law by specifically enumerating prohibited practices (such as the interlinking of companies and price fixing). The Federal Trade Commission Act, passed the same year, created a body to act, as President Woodrow Wilson explained, as a "clearing-house for the facts … and as an instrumentality for doing justice to business" (see Federal Trade Commission). Antitrust law from that point on was to be developed by administrators as well as by federal judges.

The reach of the Sherman Act has varied with time, paralleling judicial and political developments. Sections have been added and repealed, but it continues to be the main source of American antitrust law. Civil and criminal provisions have been extended to activity occurring out-side of the United States, and indications suggest its international reach may become as important as its domestic application.

Bibliography

Bork, Robert. The Antitrust Paradox: A Policy at War with Itself. New York: Basic Books, 1978.

Hovenkamp, Herbert. Enterprise and American Law, 1836–1937. Cambridge, Mass.: Harvard University Press, 1991.

McCraw, Thomas K. Prophets of Regulation. Cambridge, Mass.: Harvard University Press, 1984.

Peritz, Rudolph J. R. Competition Policy in America, 1888–1992: History, Rhetoric, Law. New York: Oxford University Press, 1996.

Thorelli, Hans B. The Federal Antitrust Policy: Origination of an American Tradition. Baltimore: Johns Hopkins Press, 1954.

Troesken, Werner. "Did the Trusts Want a Federal Antitrust Law? An Event Study of State Antitrust Enforcement and Passage of the Sherman Act." In Public Choice Interpretations of American Economic History. Edited by Jac C. Heckelman et al. Boston: Kluwer Academic Press, 2000.

Wiebe, Robert H. The Search for Order, 1877–1920. New York: Hill and Wang, 1967. Reprint, Westport, Conn: Greenwood Press, 1980.

The general government is not placed by the Constitution in such a condition of helplessness that it must fold its arms and remain inactive while capital combines, under the name of a corporation, to destroy competition. … The doctrine of the autonomy of the states cannot properly be invoked to justify a denial of power in the national government to meet such an emergency, involving, as it does, that freedom of commercial intercourse among the states which the Constitution sought to attain.

Source: From United States v. E. C. Knight Company (1895), Justice Harlan dissenting.

That which belongs to commerce is within the jurisdiction of the United States, but that which does not belong to commerce is within the jurisdiction of the police power of the state.…Itis vital that the inde pendence of the commercial power and of the police power, and the delimitation between them, however sometimes perplexing, should always be recognized and observed, for, while the one furnishes the strongest bond of union, the other is essential to the preservation of the autonomy of the states as required by our dual form of government; and acknowledged evils, however grave and urgent they may appear to be, had better be borne, than the risk be run, in the effort to suppress them, of more serious consequences by resort to expedients of even doubtful constitutionality.

Source: From United States v. E. C. Knight Company (1895), Chief Justice Fuller, majority opinion.

The Sherman Anti-Trust Act of 1890 (15 U.S.C.A. § 1 et seq.), the first and most significant of the U.S. antitrust laws, was signed into law by President Benjamin Harrison and is named after its primary supporter, Ohio Senator John Sherman.

The prevailing economic theory supporting antitrust laws in the United States is that the public is best served by free competition in trade and industry. When businesses fairly compete for the consumer's dollar, the quality of products and services increases while the prices decrease. However, many businesses would rather dictate the price, quantity, and quality of the goods that they produce, without having to compete for consumers. Some businesses have tried to eliminate competition through illegal means, such as fixing prices and assigning exclusive territories to different competitors within an industry. Antitrust laws seek to eliminate such illegal behavior and promote free and fair marketplace competition.

The common law traditionally has favored competition, finding agreements and contracts that restrain trade to be illegal and unenforceable. During the 1800s several states enacted antitrust statutes, but by the late 1800s these statutes proved ineffective in stopping the rapidly growing and powerful trusts, because many forms of restraint on commercial competition extended across state lines. The trusts were corporate holding companies that, by 1888, had consolidated a very large share of U.S. manufacturing and mining industries into nationwide monopolies. These monopolies were popularly called "trusts" because the original legal form of their organization had been as business trusts. But changes in state business laws in the 1800s allowed them to act as holding companies, leading to the combinations. The trusts found that through consolidation they could charge monopoly prices and thus make excessive profits and large financial gains. Access to greater political power at state and national levels led to further economic benefits for the trusts, such as tariffs or discriminatory railroad rates or rebates. The most notorious of the trusts were the Sugar Trust, the Whisky Trust, the Cordage Trust, the Beef Trust, the Tobacco Trust, John D. Rockefeller's Oil Trust (Standard Oil of New Jersey), and J. P. Morgan's Steel Trust (U.S. Steel Corporation).

Consumers, workers, farmers, and other suppliers were directly hurt monetarily as a result of the monopolizations, and they demanded legislative action. Even more important, perhaps, was that the trusts fanned into renewed flame a traditional U.S. fear and hatred of unchecked power, whether political or economic, and particularly of monopolies that ended or threatened equality of opportunity to aspiring business venturers. The public's intense demands for legislative action in the late 1800s prompted Congress to pass the Sherman Act, followed by several other antitrust acts. The Clayton Act of 1914 (15 U.S.C.A. § 12 et seq.), the Federal Trade Commission Act of 1914 (15 U.S.C.A. § 41 et seq.), and the Robinson-Patman Act of 1936 (15 U.S.C.A. §§ 13a, 13b, 21a) are also significant antitrust laws that, together with the Sherman Act, prohibit anticompetitive practices and prevent unreasonable concentrations of economic power that stifle or weaken competition.

The Sherman Act made agreements "in restraint of trade" and "monopolization" illegal, subject to civil remedies and criminal penalties. Courts can issue injunctions to stop violations of the act, also subjecting the violator to treble (triple) damages by anyone injured by the violation. Private parties can bring actions seeking treble damages, and the U.S. Department of Justice and the Federal Trade Commission (FTC) have the duty to institute actions for other violations of the antitrust laws. The purpose of the act was to make competition the rule in U.S. trade and commerce and to outlaw conduct that might lead to monopoly, but its general language provided virtually no standards. Congress enacted the Sherman Act pursuant to its constitutional power to regulate commerce, and this was only the second occasion in the one hundred years of the existence of the nation in which Congress relied on that power. Because Congress was somewhat uncertain of the reach of that legislative power, it framed the law in broad common-law concepts that lacked details. This in effect passed the problem along to the executive branch to determine how to enforce the law and also to the judicial branch to determine how to interpret the law. Still, the act was a far-reaching legislative departure from the predominant laissez-faire philosophy of the era.

Initial enforcement of the Sherman Act was halting, set back in part by the decision of the Supreme Court in United States v. E. C. Knight Co., 156 U.S. 1, 15 S. Ct. 249, 39 L. Ed. 325 (1895), that manufacturing was not interstate commerce. This problem was soon circumvented, and President Theodore Roosevelt promoted the antitrust cause, calling himself a "trustbuster." A number of major cases were successfully brought in the first decade of the century, largely terminating the trusts and basically transforming the face of U.S. industrial organization. During the 1920s, enforcement efforts were more modest, and during much of the 1930s, the national recovery program of the New Deal encouraged industrial collaboration rather than competition. During the late 1930s, an intensive enforcement of the antitrust laws was undertaken. Since World War II, antitrust enforcement has become increasingly institutionalized in the Antitrust Division of the Justice Department and in a more professional Federal Trade Commission. Justice Department enforcement activities against cartels are particularly vigorous, and criminal sanctions are increasingly sought. The number of private treble damage suits, often in class actions, has grown rapidly in recent years. In 1992 the Justice Department expanded its enforcement policy to cover foreign company conduct that harms U.S. exports.

Restraint of Trade

Section one of the Sherman Act provides that "[e]very 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." The broad language of this section has been slowly defined and narrowed through judicial decisions.

The courts have interpreted the act to forbid only unreasonable restraints of trade. The Supreme Court promulgated this flexible rule, called the rule of reason, in Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 31 S. Ct. 502, 55 L. Ed. 619 (1911). Under the rule of reason, the courts will look to a number of factors in deciding whether the particular restraint of trade unreasonably restricts competition. Specifically, the court considers the makeup of the relevant industry, the defendants' positions within that industry, the ability of the defendants' competitors to respond to the challenged practice, and the defendants' purpose in adopting the restraint. This analysis forces courts to consider the pro-competitive effects of the restraint as well as its anticompetitive effects.

The Supreme Court has also declared certain categories of restraints to be illegal per se: that is, they are conclusively presumed to be unreasonable and therefore illegal. For those types of restraints, the court does not have to go any further in its analysis than to recognize the type of restraint, and the plaintiff does not have to show anything other than that the restraint occurred.

Restraints of trade can be classified as horizontal or vertical. A horizontal agreement is one involving direct competitors at the same level in a particular industry, and a vertical agreement involves participants who are not direct competitors because they are at different levels. Thus, a horizontal agreement can be among manufacturers or retailers or wholesalers, but it does not involve participants from across the different groups. A vertical agreement involves participants from one or more of the groups — for example, a manufacturer, a wholesaler, and a retailer. These distinctions become difficult to make in certain fact situations, but they can be significant in determining whether to apply a per se rule of illegality or the rule of reason. For example, horizontal market allocations are per se illegal, but vertical market allocations are subject to the rule-of-reason test.

Concerted Action

Section one of the Sherman Act prohibits concerted action, which requires more than a unilateral act by a person or business alone. The Supreme Court has stated that an organization may deal or refuse to deal with whomever it wants, as long as that organization is acting independently. But if a manufacturer and certain retailers agree that a manufacturer will only provide products to those retailers and not others, that is a concerted action that may violate the Sherman Act. A company and its employees are considered an individual entity for the purposes of this act. Likewise, a parent company and its wholly owned subsidiaries are considered an individual entity.

Evidence of a concerted action may be shown by an express or written agreement, or it may be inferred from circumstantial evidence. Conscious parallelism (similar patterns of conduct among competitors) is not sufficient in and of itself to imply a conspiracy. The courts have held that conspiracy requires an additional element such as complex actions that would benefit each competitor only if all of them acted in the same way.

Joint ventures, which are a form of business association among competitors designed to further a business purpose, such as sharing cost or reducing redundancy, are generally scrutinized under the rule of reason. But courts first look at the reason that the joint venture was established to determine whether its purpose was to fix prices or engage in some other unlawful activity. Congress passed the National Cooperative Research Act of 1984 (15 U.S.C.A. §§ 4301-06) to permit and encourage competitors to engage in joint ventures that promote research and development of new technologies. The rule of reason will apply to those types of joint ventures.

Price Fixing

The agreement to inhibit price competition by raising, depressing, fixing, or stabilizing prices is the most serious example of a per se violation under the Sherman Act. Under the act, it is immaterial whether the fixed prices are set at a maximum price, a minimum price, the actual cost, or the fair market price. It is also immaterial under the law whether the fixed price is reasonable.

All horizontal and vertical price-fixing agreements are illegal per se. Horizontal price-fixing agreements include agreements among sellers to establish maximum or minimum prices on certain goods or services. This can also include competitors' changing their prices simultaneously in some circumstances. Also significant is the fact that horizontal price-fixing agreements may be direct or indirect and still be illegal. Thus, a promotion or discount that is tied closely to price cannot be raised, depressed, fixed, or stabilized, without a Sherman Act violation. Vertical price-fixing agreements include situations where a wholesaler mandates the minimum or maximum price at which retailers may sell certain products.

Market Allocations

Market allocations are situations where competitors agree to not compete with each other in specific markets, by dividing up geographic areas, types of products, or types of customers. Market allocations are another form of price fixing. All horizontal market allocations are illegal per se. If there are only two computer manufacturers in the country and they enter into a market allocation agreement whereby manufacturer A will only sell to retailers east of the Mississippi and manufacturer B will only sell to retailers west of the Mississippi, they have created monopolies for themselves, a violation of the Sherman Act. Likewise, it is an illegal agreement that manufacturer A will only sell to retailers C and D and manufacturer B will only sell to retailers E and F.

Territorial and customer vertical market allocations are not per se illegal but are judged by the rule of reason. In 1985 the Department of Justice announced that it would not challenge any restraints by a company that has less than 10 percent of the relevant market or whose vertical price index, a measure of the relevant market share, indicates that collusion and exclusion are not possible for that company in that market.

Boycotts

A boycott, or a concerted refusal to deal, occurs when two or more companies agree not to deal with a third party. These agreements may be clearly anticompetitive and may violate the Sherman Act because they can result in the elimination of competition or the reduction in the number of participants entering the market to compete with existing participants. Boycotts that are created by groups with market power and that are designed to eliminate a competitor or to force that competitor to agree to a group standard are per se illegal. Boycotts that are more cooperative in nature, designed to increase economic efficiency or make markets more competitive, are subject to the rule of reason. Generally, most courts have found that horizontal boycotts, but not vertical boycotts, are per se illegal.

Tying Arrangements

When a seller conditions the sale of one product on the purchase of another product, the seller has set up a tying arrangement, which calls for close legal scrutiny. This situation generally occurs with related products, such as a printer and paper. In that example, the seller only sells a certain printer (the tying product) to consumers if they agree to buy all their printer paper (the tied product) from that seller.

Tying arrangements are closely scrutinized because they exploit market power in one product to expand market power in another product. The result of tying arrangements is to reduce the choices for the buyer and exclude competitors. Such arrangements are per se illegal if the seller has considerable economic power in the tying product and affects a substantial amount of interstate commerce in the tied product. If the seller does not have economic power in the tying product market, the tying arrangement is judged by the rule of reason. A seller is considered to have economic power if it occupies a dominant position in the market, its product is advantaged over other competing products as a result of the tying, or a substantial number of consumers has accepted the tying arrangement (evidencing the seller's economic power in the market).

Monopolies

Section two of the Sherman Act prohibits monopolies, attempts to monopolize, or conspiracies to monopolize. A monopoly is a form of market structure where only one or very few companies dominate the total sales of a particular product or service. Economic theories show that monopolists will use their power to restrict production of goods and raise prices. The public suffers under a monopolistic market because it does not have the quantity of goods or the low prices that a competitive market could offer.

Although the language of the Sherman Act forbids all monopolies, the courts have held that the act only applies to those monopolies attained through abused or unfair power. Monopolies that have been created through efficient, competitive behavior are not illegal under the Sherman Act, as long as honest methods have been employed. In determining whether a particular situation that involves more than one company is a monopoly, the courts must determine whether the presence of monopoly power exists in the market. Monopoly power is defined as the ability to control price or to exclude competitors from the marketplace. The courts look to several criteria in determining market power but primarily focus on market share (the company's fractional share of the total relevant product and geographic market). A market share greater than 75 percent indicates monopoly power, a share less than 50 percent does not, and shares between 50 and 75 percent are inconclusive in and of themselves.

In focusing on market shares, courts will include not only products that are exactly the same but also those that may be substituted for the company's product based on price, quality, and adaptability for other purposes. For example, an oat-based, round-shaped breakfast cereal may be considered a substitutable product for a rice-based, square-shaped breakfast cereal, or possibly even a granola breakfast bar.

In addition to the product market, the geographic market is also important in determining market share. The relevant geographic market, the territory in which the firm sells its products or services, may be national, regional, or local in nature. Geographic market may be limited by transportation costs, the types of product or service, and the location of competitors.

Once sufficient monopoly power has been proved, the Sherman Act requires a showing that the company in question engaged in unfair conduct. The courts have differing opinions as to what constitutes unfair conduct. Some courts require the company to prove that it acquired its monopoly power passively or that the power was thrust upon them. Other courts consider it an unfair power if the monopoly power is used in conjunction with conduct designed to exclude competitors. Still other courts find an unfair power if the monopoly power is combined with some predatory practice, such as pricing below marginal costs.

Attempts to Monopolize

Section two of the Sherman Act also prohibits attempts to monopolize. As with other behavior prohibited under the Sherman Act, courts have had a difficult time developing a standard that distinguishes unlawful attempts to monopolize from normal competitive behavior. The standard that the courts have developed requires a showing of specific intent to monopolize along with a dangerous probability of success. However, the courts have no uniform definition for the terms intent or success. Cases suggest that the more market power a company has acquired, the less flagrant its attempt to monopolize must be.

Conspiracies to Monopolize

Conspiracies to monopolize are unlawful under section two of the Sherman Act. This offense is rarely charged alone, because a conspiracy to monopolize is also a combination in restraint of trade, which violates section one of the Sherman Act.

In accordance with traditional conspiracy law, conspirators to monopolize are liable for the acts of each coconspirator, even their superiors and employees, if they are aware of and participate in the overall mission of the conspiracy. Conspirators who join in the conspiracy after it has already started are liable for every act during the course of the conspiracy, even those events that occurred before they joined.

See: Antitrust Law; Mergers and Acquisitions; Unfair Competition; Vertical Merger.

A federal law passed in 1890 that committed the American government to opposing monopolies. The law prohibits contracts, combinations, or conspiracies “in the restraint of trade or commerce.” Under the authority of the Sherman Antitrust Act, the federal government initiated suits against the Standard Oil Company and the American Tobacco Company. (See trust busting.)

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John Sherman

The Sherman Antitrust Act (Sherman Act^[1], July 2, 1890, ch. 647, 26 Stat. 209, 15 U.S.C. § 1–7), was the first United States government action to limit cartels and monopolies. It is the oldest of all U.S. antitrust laws.

The Sherman Act provides: "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 declared to be illegal".^[2] The Act also provides: "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 [. . . ]"^[3] The Act put responsibility upon government attorneys and district courts to pursue and investigate trusts, companies and organizations suspected of violating the Act.

The Act was signed by President Benjamin Harrison in 1890 and was named after its author, Senator John Sherman, an Ohio Republican, chairman of the Senate Finance Committee, the Secretary of Treasury under President Rutherford Hayes, and Secretary of State under President William McKinley. After passing in the Senate on April 8, 1890 by a vote of 51-1, the legislation passed unanimously (242-0) in the House of Representatives on June 20, 1890.

The Act was not used in court cases for some years. President Theodore Roosevelt used the Act extensively in his antitrust campaign, including to divide the Northern Securities Company. President William Howard Taft used the Act to split the American Tobacco Company.

Despite its name, the Act was not aimed at trusts in particular, but at any form which would create a "restraint of trade". The word "antitrust" was used because the Act was initially proposed to break up the Standard Oil trust. Ironically, by the time antitrust laws were finally brought to bear against the company, it was no longer using the form of a trust. The term "antitrust law" has persisted in the United States for what the rest of the world calls "competition law," even though antitrust laws are almost never used against trusts.

Although the Act was aimed at regulating businesses, it was not specific to them: the prohibition is of combinations in restraint of trade. It was used for many years as an anti-union tool, until that use was revoked in 1914 by the Clayton Antitrust Act.

The Act was intended to prevent arrangements designed to, or which tend to, increase the cost of goods to the consumer. It was not specifically intended to prevent the dominance of an industry by a specific company, despite misconceptions to the contrary. According to Senator George Hoar, an author of the bill, any company that "got the whole business because nobody could do it as well as he could" would not be in violation of the act. The law attempts to prevent the artificial raising of prices by restriction of trade or supply [1].

Criticism of the Sherman Antitrust Act

Critics question whether the Act improves competition and benefits consumers, or merely aids inefficient businesses at the expense of larger, more innovative ones. Alan Greenspan, in his essay entitled Antitrust [2] condemns the Sherman Act as stifling innovation and harming society. He says: "No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born. No one can ever compute the price that all of us have paid for that Act which, by inducing less effective use of capital, has kept our standard of living lower than would otherwise have been possible."

Others debate whether the goal of antitrust legislation should be increased competition or lower prices. For example, arguing in favor of the Act in 1890, Representative William Mason said "trusts have made products cheaper, have reduced prices; but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to people of this country by the trusts which have destroyed legitimate competition and driven honest men from legitimate business enterprise."^[4] On the other hand, some believe that as long as a monopoly is not a coercive monopoly where a firm is securely insulated from potential competition, it will keep prices low in order to discourage competition from arising. Hence, they believe legal action is uncalled for, and wrongly harms the firm and consumers.

Some believe that antitrust laws have a protectionist effect. Economist Thomas DiLorenzo notes that Senator Sherman sponsored the 1890 William McKinley tariff just three months after the Sherman Act, and agrees with The New York Times which wrote on October 1, 1890: "That so-called Anti-Trust law was passed to deceive the people and to clear the way for the enactment of this...law relating to the tariff" and said Sherman attacked trusts because they "subverted the tariff system; they undermined the policy of government to protect American industries by levying duties on imported goods." Dilorenzo says: "Protectionists did not want prices paid by consumers to fall. But they also understood that to gain political support for high tariffs they would have to assure the public that industries would not combine to increase prices to politically prohibitive levels. Support for both an antitrust law and tariff hikes would maintain high prices while avoiding the more obvious bilking of consumers."^[5]

Another possible angle is that provided by energy rents, that is the difference between the value (to producer or consumer) of energy and its cost. The Sherman Act, being directed specifically at John D. Rockefeller's Standard Oil trust, can be seen as a precursor to the Public Utilities Commissions established in the 1930s in response to electrification and the corresponding profit opportunities. Historically, new energy sources have yielded rents to both consumers and producers (of energy). The mood in the 1880s was that no one individual should be given reign over as large a chunk of energy rents, despite the fact that Standard Oil's gas, kerosene, and oil prices were below those of its competitors.^{[citations needed]}

See also

• Alcoa
• American Tobacco Company
• AT&T
• Microsoft
• Northern Securities Company
• Ticketmaster
• Standard Oil
• Tying (commerce)
• Antitrust
• Cartel
• Clayton Antitrust Act of 1914
• List of corporate executives charged with crimes
• DRAM price fixing
• Monopoly
• Price fixing
• Resale price maintenance

Notes

1. ^ As it was formally designated by the Hart-Scott-Rodino Antitrust Improvements Act in 1976.
2. ^ See 15 U.S.C. § 1.
3. ^ See 15 U.S.C. § 2.
4. ^ Congressional Record, 51st Congress, 1st session, House, June 20, 1890, p. 4100.
5. ^ DiLorenzo, Thomas, Cato Handbook for Congress, Antitrust.

External links

Official websites

• U.S. Department of Justice: Antitrust Division
• U.S. Department of Justice: Antitrust Division - text of SHERMAN ANTITRUST ACT, 15 U.S.C. §§ 1-7

Additional information

• Antitrust Division's "Corporate Leniency Policy"
• Antitrust by Alan Greenspan
• Dr. Edward W. Younkins (February 19, 2000). "Antitrust Laws Should Be Abolished".
• DiLorenzo, Thomas Cato Handbook for Congress, Antitrust.
• Sherman Anti-Trust Act Full text and commentary

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