27/12/2019 Understanding Antitrust Laws

ECONOMY GOVERNMENT & POLICY

Understanding Antitrust Laws

By BARCLAY PALMER | Updated May 20, 2019

TABLE OF CONTENTS
What Are Antitrust Laws?
Market Allocation
Bid Rigging is Illegal
Price Fixing
EXPAND +
Monopolies

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.

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What Are Antitrust Laws?

Antitrust laws also referred to as competition laws, are statutes developed by the U.S.
government to protect consumers from predatory business practices. They ensure that fair
competition exists in an open-market economy. These laws have evolved along with the
market, vigilantly guarding against would-be monopolies and disruptions to the productive
ebb and flow of competition.

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Antitrust laws are applied to a wide range of questionable business activities, including but
not limited to market allocation, bid rigging, price fixing, and monopolies. Below, we take a
look at the activities these laws protect against.

If these laws didn't exist, consumers would not benefit from different options or competition
in the marketplace. Furthermore, consumers would be forced to pay higher prices and would
have access to a limited supply of products and services.

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.

In 2000, the Federal Trade Commission (FTC) found FMC Corp. guilty of colluding with Asahi
Chemical Industry to divide the market for microcrystalline cellulose, a primary binder in
pharmaceutical tablets. The Commission barred FMC from distributing micro-crystalline
cellulose to any competitors for 10 years in the United States, and also banned the company
from distributing any Asahi products for five years.

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Bid Rigging is Illegal

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. 

Bid Suppression: Competitors refrain from bidding or withdraw a bid so a designated

winner’s bid is accepted.
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. 

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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.

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.

For example, Apple lost an appeal regarding a 2013 U.S. Department of Justice ruling that
found it guilty of fixing the prices of ebooks. Apple was found liable to pay $450 million in
damages.

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.

Below are a few types of monopolistic behavior that can be grounds for legal action:

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. 
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

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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. 
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. 

Mergers and Acquisitions

No introduction to antitrust legislation would be complete without addressing mergers and
acquisitions. We can divide these into horizontal, vertical and potential competition
mergers.

Horizontal Mergers: When firms with dominant market shares prepare to enter a merger, the
FTC must decide whether the new entity will be able to exert monopolistic and anti-
competitive pressures on the remaining firms. For example, the company that makes Malibu
Rum and had an 8% market share of total rum sales, proposed buying the company that
makes Captain Morgan’s rums, which had a 33% of total sales to form a new company
holding 41% market share.

Meanwhile, the incumbent dominant firm held over 54% of sales. This would mean the
premium rum market would be composed of two competitors together responsible for over
95% of sales in total. The FTC challenged the merger on the grounds that the two remaining
companies could collude to raise prices and forced Malibu to divest its rum business.

Unilateral Effects. The FTC will often challenge mergers between rival firms that offer close
substitutes, on the grounds that the merger will eliminate beneficial competition and
innovation. In 2004, the FTC did just that, by challenging a merger between General Electric
and a rival firm, as the rival firm manufactured competitive non-destructive testing
equipment. In order to go forward with the merger, GE agreed to divest its non-destructive
testing equipment business.

Vertical Mergers. Mergers between buyers and sellers can improve cost savings and business
synergies, which can translate to competitive prices for consumers. But when the vertical
merger can have a negative effect on competition due to a competitor’s inability to access
supplies, the FTC may require certain provisions prior to the completion of the merger. For

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example, Valero Energy had to divest certain businesses and form an informational firewall
when it acquired an ethanol terminator operator.

Potential Competition Mergers. Over the years, the FTC has challenged rampant preemptive
merger activity in the pharmaceutical industry between dominant firms and would-be or
new market entrants to facilitate competition and entry into the industry.

The Big Three Antitrust Laws

Let’s take a brief look at the main antitrust laws in the United States. The core of U.S.
antitrust legislation was created by three pieces of legislation: the Sherman Anti-Trust Act of
1890, the Federal Trade Commission Act—which also created the FTC—and the Clayton
Antitrust Act.

1. The Sherman Anti-Trust Act intended to prevent unreasonable "contract, combination or

conspiracy in restraint of trade," and "monopolization attempted monopolization or
conspiracy or combination to monopolize." Violations against the Sherman Anti-Trust Act
can have severe consequences, with fines of up to $100 million for corporations and $1
million for individuals, as well as prison terms up to 10 years. 
2. The Federal Trade Commission Act bans "unfair methods of competition" and "unfair or
deceptive acts or practices." According to the Supreme Court, violations of the Sherman
Anti-Trust Act also violate the Federal Trade Commission Act. Therefore, even though the
FTC cannot technically enforce the Sherman Anti-Trust Act, it can bring cases under the
FTC Act against violations of the Sherman Anti-Trust Act.
3. The Clayton Antitrust Act addresses specific practices that the Sherman Anti-Trust Act
may not address. According to the FTC, these include preventing mergers and acquisitions
that may "substantially lessen competition or tend to create a monopoly," preventing
discriminatory prices, services and allowances in dealings between merchants, requiring
large firms to notify the government of possible mergers and acquisitions, and imbuing
private parties with the right to sue for triple damages when they have been harmed by
conduct that violates the Sherman and Clayton acts, as well as allowing the victims to
obtain court orders to prohibit further future transgressions.

The Bottom Line

At their core, antitrust provisions are designed to maximize consumer welfare. Supporters of
the Sherman Act, the Federal Trade Commission Act and the Clayton Antitrust Act argue that
since their inception, these antitrust laws have protected the consumer and competitors
against market manipulation stemming from corporate greed. Through both civil and
criminal enforcement, antitrust laws seek to stop price and bid rigging, monopolization, and
anti-competitive mergers and acquisitions.

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ECONOMICS
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Partner Links

Related Terms
Antitrust Laws: Keeping Healthy Competition in the Marketplace
Antitrust laws apply to virtually all industries and to every level of business, including manufacturing,
transportation, distribution, and marketing. more

Why the 1914 Clayton Antitrust Act Is Relevent Today

The Clayton Antitrust Act of 1914 is designed to promote business competition and prevent the
formation of monopolies and other unethical business practices. more

Monopoly
A monopoly occurs when a company and its offerings dominate an industry. Although many
monopolies are illegal, some are government sanctioned. more

What Is Bid Rigging?

Bid rigging is an illegal practice in which competing parties collude to choose the winner of a bidding
process while others submit uncompetitive bids. more

The Celler-Kefauver Act

The Celler-Kefauver Act was an anti-merger act passed by the U.S. Congress in 1950, to prevent anti-
competitive mergers and acquisitions. more

Behind Price Fixing

Price fixing is setting the price of a product or service, rather than allowing it to be determined
naturally through free-market forces. more

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