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What is Anti Trust Law & How Did It Develop in the USA?

what is antitrust law

In July 2019, the U.S.government targeted America’s biggest tech companies – The tech monopolies Google, Facebook & Amazon. The Department of Justice and the FTC appear to be looking at whether the leading tech platforms have used improper means to acquire monopoly positions or to exclude promising rivals from contesting their position.

What does it mean? Are these companies getting too big and did they get that way illegally? These questions fall under a set of laws that until recently had faded from the public spotlight. Antitrust has gone from being this completely sleepy backwater discipline that only a few people talked about to being very much in the public news. We’ve started to see a lot of discussions if there is a need for more enforcement of antitrust. Are we enforcing these laws and using these tools in the way that they were intended to be?

It is not just tech. Antitrust concerns have arisen around other industries that are also dominated by a few huge companies like domestic airlines, pharmaceuticals, telecommunications, and beer. There is always this kind of balance between the desire for an efficient economy and this fear of what happens to society, to democracy, to the interests of consumers, the interest of labor.

What is Antitrust Law?

The first federal antitrust law was passed in 1890 and two more followed in 1914. The antitrust laws started as being against power and making it easier for small firms to get into the market and survive, as well as to cater to consumers. They sought to prevent companies from getting too big or engaging in unfair practices like colluding to fix prices. The US government created an agency to enforce those standards. The antitrust laws were a reaction to the industrialization of the late 19th century because of the perception that there was too much economic power over specific industries being concentrated in a few hands – for example people like John D Rockefeller and J.P.Morgan.

Rockefeller and Morgan were part of a movement that thought bigger businesses were better businesses and monopolies were the best. Its followers believed in consolidating whole industries into single firms or grouping firms into trusts. From 1895 to 1984, thousands of manufacturing firms merged into just 157 corporations. Morgan consolidated the steel, railroad, shipping and electricity industries and inspired copycats in tobacco, rubber, film production and more. But it was Rockefeller’s Standard Oil Company that became the first blockbuster-antitrust case.

Rockefeller combined dozens of state-based companies like Standard Oil Company of Ohio, of Nebraska, etc.into one. By 1984, Standard Oil controlled 91 percent of oil production and 85 percent of sales. Following a searing exposé of Standard Oil’s business practices by journalist Ida Tarbell, President Teddy Roosevelt’s administration filed an antitrust suit against the company in 1986. After a five-year court battle, the Supreme Court ordered the breakup of Standard Oil.

Standard Oil was divested back into the local companies that had formed Standard Oil in the first place. Over time, of course, these companies began to compete with each other again. New companies entered the market and a much more competitive oil industry evolved. That result took a long time to happen.

Innovation boomed and the overall value of the industry increased, as did Rockefeller stock in the new companies. A flurry of antitrust activity followed. By the end of the 1910s, most of the major trusts had been broken up or regulated in some other way under antitrust law.

But this aggressive approach ended when World War 1 began…

How Did The Antitrust Law Develop in the USA?

After the US entered the war, the view was, that the economy cannot afford to have antagonism between the federal government and big businesses. This shift highlights a key theme of U.S. antitrust law – how it’s enforced or whether it’s enforced at all depends heavily on the political will of the agencies, courts, and president. The guidance in the laws is more than any other area of federal law exceedingly broad and in many instances vague. There is a difference between having a law on the books and having a law be enforced. The regulatory agencies can do with the law what they want.

President Franklin D.Roosevelt briefly revived aggressive antitrust enforcement to energize the struggling Depression-era economy. But he put it aside when World War 2 began. This time, the end of the war sparked the most aggressive period of antitrust enforcement to date. The stage had been set in Hitler’s Germany.

By 1933, when Hitler comes to power, the German economy is extremely concentrated. The US economy had these big monopolies and chemicals and steel and electricity and coal and other important industries. Then-Secretary of War Kenneth Royall put it bluntly in a report that “these monopolies soon got control of Germany, brought Hitler to power and forced virtually the whole world into war.”

The United States was very concerned that the country could tip towards fascism or communism if it didn’t nurture a competitive, diverse society. Congress passed another act in 1950 to strengthen the mandate against mergers. This, combined with an extremely liberal Supreme Court, kicked off the era of peak antitrust, one where the FTC and the courts became extremely skeptical of any mergers that resulted in a larger market share for one company.

Examples of Antitrust Law Cases

Really, in the 50s and 60s, many, many cases were brought to stop mergers, even mergers that today we think of would not be problematic at all. The blockbuster case of this era was AT&T. AT&T had been the sole supplier of phone service in the US for decades. The Department of Justice filed an antitrust suit in 1974. Ultimately in 1982, that case was settled in the Reagan administration with a decree that broke up AT&T. The idea was to create a more competitive telecommunications market by infusing competition into those markets.

That sounds like a success for supporters of aggressive antitrust, right? Strictly speaking, it was – AT&T’s decade’s long monopoly over phone service ended but it also marked the end of the aggressive antitrust era and the beginning of the standard we have today.

The Aggressive Enforcement of the Antitrust Law

Let’s back up a bit. A conservative backlash against extremely aggressive antitrust enforcement had been brewing as early as the 1950s, driven by scholars at the University of Chicago. They argued that big mergers could provide better efficiency and innovation.

So there was a big movement to cut back the antitrust laws that would say firms need a lot of room to do what they want to do. Instead, these scholars proposed that antitrust suits only be brought against businesses if their actions had caused consumer harm. For example, if two businesses merged and caused products to get more expensive or worse, or if the new company somehow stifled innovation in the industry, the Supreme Court adopted this consumer welfare standard. In the 1979 case, Reiter vs.Sonotone.It fairly abruptly sort of announces that it’s shifting its direction and accepting that this so-called consumer welfare standard is the goal of antitrust law.

And when Americans voted conservative Ronald Reagan into office the following year, the fate of aggressive antitrust enforcement was sealed. Reagan campaign was based on the fact that the government had become too intrusive into the business. So this sentiment built up and Reagan ran on the ticket to get government off the back of the business. And that won the day.

That sentiment won the day and the next few decades of antitrust enforcement. The Department of Justice did bring a size-based antitrust case against Microsoft in the late 1990s but for the most part, antitrust enforcement based on the size of companies has been essentially dormant for the last 40 years. And I think you saw antitrust be consumed with or be captured by a very fundamental free-market ideology that caused regulators to put a heavy thumb on the scales, in favor of business, in favor of letting mergers go through, in favor of letting monopolies do whatever they wanted.

This is obvious if we zoom out and look at some key data on the U.S.economy.

Between 1982 and 2012, market concentration across all of these industries increased sometimes by triple-digit percentages between 1996 and 2016. The number of companies on the stock market fell by half. Also since 1996, the FTC has challenged fewer and fewer proposed mergers that would leave only five or six major firms in an industry. Which is why there are now only four major domestic airlines, four major telecommunications carriers, three major drug stores and two major beer retailers in the USA.

The Future of the Antitrust Law

What we had at the turn of the 19th century and what we have now again are companies that have a significant influence over the entire economy. This has experts wondering…

Is this another inflection point for antitrust law? Should these laws once again be skeptical of business size or should they leave these businesses alone?

It feels like this is the first time in 40 years that antitrust has a real moment to decide what it is going to be for the next 40 years. Antitrust has intervened at different times to create possibilities for much greater innovation, much more robust competition. At times, antitrust is portrayed as this magic solution – if we just break up the companies, all the other problems that we are concerned about would go away. There is no guarantee of that though.