Why Antitrust Laws Matter? (By William Markham, 2006)

The True Purpose of Antitrust Law

The antitrust laws are supposed to promote and protect competition, or, if you will, competitive processes in distinct “lines of commerce” or “relevant markets.” This alone is their proper purpose. They are not intended to punish big companies merely on account of their size or because of their commercial success. Most importantly, the antitrust laws have never been anti-market or anti-business in their underlying conception or in their implementation. On the contrary, the antitrust laws are intended to promote market economics and healthy competition in every market, while checking the abuses that sometimes arise in different markets.

The idea behind these laws is that in every market there should be robust competition: If in each market there are many sellers busily competing against one another to sell a particular kind of product or service to paying customers, no seller will be able to take unfair advantage of the buyers, but rather each seller will be obliged to offer its goods or service on attractive terms, and each will be responsive and efficient in its dealings with buyers, who otherwise will simply turn to another, better seller.

In other words, vigorous competition in any given market keeps the sellers honest, forcing them to strive continually both to improve their goods and services and to offer them on favorable terms. Customers benefit from this competition. Poorly run companies are run out of business, as they deserve to be. The better run companies, and the most honest ones too, tend to prosper. Society as a whole benefits.

This is nothing other than marketplace economics working properly and rewarding each of us for our efforts, our talent, and our perseverance. The antitrust laws exist to help marketplace economics to work better.

The Origins of the Antitrust Law

Antitrust law is the law of competition. Why then is it called “antitrust”? The answer is that these laws were originally established to check the abuses threatened or imposed by the immense “trusts” that emerged in the late 19th Century. These trusts controlled or threatened to control entire nationwide markets for rail transport, steel, petroleum, banking, and related lines of commerce. The antitrust laws were established to ensure that these trusts did not permanently undermine competition in these or other markets.

Anti-Business or Pro-Competition?

The antitrust laws serve to promote and protect market economics, doing so on the theory that society flourishes the most when it is founded on vigorous competition: According to this theory, competition brings forth the best in each of us, keeping each of us on our toes, mindful that if we do not perform well, we will be cast aside for someone else who can perform better. It is a harsh logic, and it works very well because it rightly understands and anticipates actual human nature and human psychology in action.

To paraphrase Adam Smith, the baker does not ask himself whether you might wish to enjoy some of his excellent bread this evening with your meal. No, he wants you to give him money, and thus he strives to make excellent bread so that you will be persuaded to purchase your bread from him and not from some other baker.

Antitrust laws are meant to ensure that these incentives and the resulting excellence and low prices flourish in every market (save those that by their very nature admit the presence of only one seller). We want to have many bakers competing for your business. If you happen to be a baker, we want you to compete against your rivals for our business. We do not want one baker, or a group of bakers, to destroy competition in their local market so that they can then force the customers to submit to higher prices, less responsive service or poorly baked bread.

The Besetting Flaw of Market Economics

The antitrust laws exist not to punish or dismantle successful, prosperous companies, even the most dominant global monopolies of the era. These laws instead are meant to redress or temper the fundamental flaw that seems inherent in unbridled competition. That is, the antitrust laws serve to “correct” the inherent contradiction of market economies, which is as follows: In many key markets, one firm or a clutch of major firms often come to dominate the entire market. Once this happens, competition in this market ceases altogether or at best becomes a pale shadow of its former self. Antitrust laws provide protection and relief from this scenario. If competition obliges sellers to act on their best behavior, then the antitrust laws oblige dominant competitors to do the same rather than abuse their dominance in order to take advantage of their captive customers. The only other alternatives are as follows: (1) Do nothing and allow various anti-competitive monopolies and cartels to form and suffocate commerce, innovation and responsive service in the markets that they control; or (2) impose stultifying government regulation.

More specifically, the antitrust laws serve to check and redress the improper acquisition and abuse of market dominance. In particular, these laws forbid two categories of conduct: (1) monopolization — i.e., the use of “anti-competitive measures” to acquire, preserve or enlarge monopoly power in a given market; and (2) unlawful restraints of trade — i.e., conduct jointly undertaken by two or more independent actors that unfairly suppresses “competition on the merits” in a given market, leading to higher prices, worse service, lack of innovation or loss of choice.

Why these proscriptions? Because the antitrust laws presuppose that unrestrained market competition is the best method of promoting lasting prosperity and wealth for the greatest number. But unrestrained competition, put into practice, often leads to the emergence of stultifying monopolies and oligopolies that take unfair advantage of their customers while hindering innovation and commercial excellence. This is the great and eternal contradiction of market economics, and it is this contradiction that the antitrust laws seek to redress.

What Antitrust Laws Try to Accomplish

Antitrust laws, properly understood, are intended to grapple with this market contradiction. In particular they forbid any improper monopoly or any attempt to obtain a monopoly by improper means — that is, a monopoly obtained, preserved or attempted by a firm that on purpose has destroyed or tried to destroy its competitors, using anti-competitive tactics whose sole or true purpose has been to undermine rival businesses. The antitrust laws also forbid dominant firms to act in collusion in order to impose unfair commercial practices that tend to subvert “competition on the merits” in any market that they dominate or aim to dominate by means of the improper practice. These laws also outlaw specific kinds of recognized commercial fraud that by their very nature are calculated to destroy competition in the market in which they are employed (the most notable offenders are bid-rigging, price-fixing, and horizontal market allocation).

The Charter Principles of Antitrust Law

Broadly speaking, the antitrust laws set forth a series of general propositions that serve as the “charter principles” of marketplace economics in the United States. I think these charter principles and their corollaries can be summarized as follows:

Monopolization. A monopoly is not unlawful, but obtaining or maintaining monopoly power by anticompetitive means constitutes a serious antitrust offense. Specifically, a defendant firm can be held liable for unlawful monopolization in violation of Section 2 of the Sherman Act if the following matters are proved against it: First, that the defendant firm holds monopoly power in a properly defined relevant market — which can be proven by direct evidence of the defendant’s ability to impose supracompetitive prices or by a showing that the defendant makes a dominant percentage of overall sales, and that its market share is protected by strong barriers to entry and expansion. by new rivals as well as strong barriers to expansion by existing rivals; and second, that the defendant firm has acquired or maintained its monopoly power by means of anticompetitive practices — which broadly speaking are business practices that the defendant employs to undermine its rivals and obstruct their ability to compete against it rather than to improve its own offerings. If the government proves these points, it will prevail. If the plaintiff is a private litigant, it must also prove its own antitrust injury — which means harm that it has suffered in proximate consequence of an anticompetitive aspect of the challenged anticompetitive conduct.

Attempted Monopolization/Conspiracies to Monopolize. It is also improper for a firm to attempt to acquire a monopoly by means of anticompetitive business practices. Specifically, a defendant firm can be held liable for attempted monopolization in violation of Section 2 of the Sherman Act if the following points are proved against it: First, that the defendant firm has employed anticompetitive practices with the specific intent of acquiring a monopoly position in a properly defined relevant market; and second, that there exists a “dangerous probability” that the defendant will succeed in the effort unless there is an antitrust intervention. A private litigant must also prove its own antitrust injury.

The last of the monopolization offenses is called a “conspiracy to monopolize.” This offense is said to occur when two or more independent, unaffiliated economic actors conspire to confer monopoly power on a single firm by means of anticompetitive practices. Each conspirator must take at least one act in furtherance of the common plan to obtain monopoly power by means of anticompetitive practices. As in all antitrust cases, a private litigant must prove its antitrust injury in order to establish a claim for this offense.

Restraints of Trade. It is also illegal under the antitrust laws for two or more independent, unaffiliated firms to act in concert to employ commercial practices that harm competitive processes in a properly defined relevant market. There are three categories of unlawful trade restraints: (1) Restraints that are unlawful per se; (2) restraints that are condemned under the so-called “Rule of Reason; and (3) restraints that are condemned under the “quick-look” doctrine.

Per Se Offenses. It is always improper for two or more direct competitors to set or manipulate the prices that they charge their customers. The offense is called horizontal price-fixing. Nor can competitors pre-arrange bids at competitive auctions or in response to bid-solicitations (bid-rigging); nor can they allocate among themselves parts of a market by customer, territory, specified contracts or product line (horizontal market allocation); nor can they coordinate horizontal group boycotts (a coordinated refusal to deal with a supplier, customer or competitor in order to deprive it of supplies or facilities that it requires to continue competing in a given line of commerce); nor in certain cases can they provide a commercially indispensable product or service only on condition that the buyers also purchase another product or service (unlawful tying). These practices, however ingeniously characterized, are usually treated as per se antitrust offenses. Per se restraints are usually imposed by direct competitors that collectively wield market power. The classic per se violation is price-fixing imposed by large firms in highly concentrated markets. An emerging doctrine is that trade restraints should be deemed unlawful when they are “naked” but not when they are “ancillary.”

The Rule of Reason. Business dealings between companies can be condemned as trade restraints under the rule of reason only if the following matters are proven: (1) The plaintiff must show that the challenged practices have caused harm to competition in a properly defined relevant market; (2) if the plaintiff makes this showing, the defendants must then show that the challenged practices serve a legitimate, important business purpose; and (3) if the defendants make this showing, the plaintiff must show that the claimed business purposes are a mere pretext or that they could be reasonably accomplished by less restrictive practices. If the plaintiff makes this last showing, the judge or jury must then decide whether the challenged practices on balance cause more harm to competition than they fulfill legitimate commercial aims. “Harm to competition” usually means practices that suppress or restrict competitive rivalries that would otherwise yield lower prices, better products, more products or a wider variety of products in the relevant market.

The Quick-Look Doctrine. Business dealings can be condemned as trade restraints under the “quick-look doctrine” when they are novel or little known practices that appear likely to cause harm competition in a properly defined relevant market.

Other Offenses. There are other, more technical wrongs that likewise constitute antitrust offenses: For example, it is an antitrust offense under Section 3 of the Clayton Act for two or more firms to use exclusive-dealing arrangements, if the arrangements will probably foreclose a substantial part of overall sales in a relevant market for an extended duration and thereby prevent rival sellers from making enough sales to attain sufficient economies of scale. It is sometimes unlawful under the Robinson-Patman Act for a firm to charge different prices for the same goods when selling them to different commercial customers, but only if the practice causes harm to competition in the seller’s own market, its customers’ markets, or in tertiary markets. It is likewise unlawful for a commercial buyer to induce a seller to commit these offense. These offenses are called unlawful price discrimination.

Anti-Competitive Mergers. A proposed or completed merger or acquisition can sometimes be challenged under Section 7 of the Clayton Act if it  poses an “incipient” threat to competitive processes in a properly defined relevant market. If it is large enough, a proposed merger or acquisition must be reported in advance to federal antitrust authorities — namely, the Antitrust Division of the United Department of Justice (the “DOJ”) and the Federal Trade Commission (the “FCC”). The proponents of such a merger or acquisition must give notice of their contemplated transaction in accordance with the Hart-Scott-Rodino Act, providing extensive details about the proposed transaction. The proponent’s submission is then referred to either the DOJ or the FCC. The reviewing agency can give early notice that it has no objection; or it can decline to object, allowing the transaction to proceed; or it can request a “second round” of information, after which it might request that the proponents modify their proposed transaction in order to obtain its approval (non-objection). Sometimes the reviewing agency will bring suit in federal court to seek to enjoin the proposed transaction. If the proponents of a qualifying merger fail to give the required notice, they can be forced to pay onerous fines.

These then are the charter principles of the antitrust laws. They are principally set forth in two federal statutes — the Sherman Act and the Clayton Act — and each state has its own statute that incorporates the federal law and applies it to intrastate activities.

How Some Other Countries Approach the Same Issues

The author of this article would argue that “competition authority” in Europe is too inclined to regulate and lay a restraining hand on marketplace economics, but it seems to be improving over time, and it has certainly played a useful role in penalizing national discrimination by one EU country against firms from other EU countries. Mexico in contrast suffers from a dearth of competition law: It too much resembles a “corporatist” society in which key industries are dominated by a clutch of inter-connected firms. The United States seems to do very well in comparison to either Mexico or the European Union, but our antitrust laws rely too much on criminal law enforcement, which should be reserved only to punish outright fraud, such as bid-rigging, extortion, and blatant price-fixing by cartels. The antitrust laws of Canada are similar to our own laws, but place less emphasis on criminal punishment. The Canadian competition authorities treat competition issues as matters best suited for private litigation and civil decrees, not criminal enforcement, which seems to be sensible. On the other hand, the Canadians have mostly copied our antitrust innovations and then devised clever modifications of them. They have learned from us, and we could stand to learn from them.

Curse or Blessing?

Critics of the antitrust laws plausibly argue that these laws serve in the end merely to punish, restrain and burden the most successful competitors of every market, thereby causing enormous injury to competition. They argue that the antitrust laws harm the very thing they say they are intended to protect – competition in the marketplace. For these critics, the antitrust laws are self-contradictory, self-defeating nonsense. Worse than that, they are an expensive nuisance and a crippling burden to our most successful firms, and our economy cannot afford such burdens in this new era of globalization and outsourcing.

The critics have a point. Antitrust laws are uncertain in their application, and compliance with them can be onerous and expensive. If a firm is sued in antitrust case, it will likely be obliged to pay substantial or onerous sums to its attorneys and experts, and some of its key officers will have to devote much of their time to preparing the firm to defend itself in the case. In the meantime, the firm will likely suffer bad press. Even if the firm at length “wins” the case (i.e., is exonerated of liability for antitrust misconduct), it will find that it has lost money, effort, time and goodwill. This scenario brings to mind the old saw about lawsuits: “I have been twice ruined in my career; once when I went to the courts and lost; and a second time when I went to the courts and won!”

But the alternatives are worse. If there were no antitrust laws, a dominant firm or handful of firms would emerge in many markets, especially the really important ones, such as telecommunications, energy markets and various others in which there are significant “barriers to entry”. These firms would not only exclude all other competitors, but would sooner or later impose unfair trading terms on their business partners and ultimate customers, while failing to keep fit and responsive because of the dearth of competition from rivals. Indeed, this happens all the time in actual practice, and the proper remedy is usually antitrust intervention – a private lawsuit or public prosecution.

Unfettered competition leads to monopolies in many kinds of commerce. Monopolies in turn tend to become unresponsive to customers, less efficient, and above all more likely to impose abusive trading terms in the markets that they control. The antitrust laws do not outlaw monopolies, but they forbid a firm to acquire or maintain a monopoly position by means of commercial practices whose principal purpose and effect are to undermine rival businesses. The antitrust laws also outlaw collusive behavior by which two or more firms seek to impair “competition on the merits” so that they can impose higher prices or other unfavorable trading conditions on captive customers who lack alternatives. Antitrust penalties can be severe: The government can seek criminal convictions, prison terms, and stiff fines. Civil litigants can seek treble damages, attorneys’ fees, other costs of suit, and injunctive relief.

We need antitrust laws to redress the fundamental contradiction of marketplace economics: Competition, which yields the best products and greatest prosperity, tends to lead to efforts at monopolization and to trading abuses that can be checked only by stifling regulation or well-conceived antitrust intervention. Yes, the antitrust laws are horrible, ruinous abominations that arise from an inextricable contradiction that they do not resolve, and they involve us all in wasteful litigation and suffering. But as Winston Churchill might have said, the antitrust laws have the benefit of being better than the alternatives.

Article by William Markham, San Diego Attorney. © 2006.

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