Antitrust laws are those laws that are enacted to promote and maintain competition in a given market. Antitrust laws are based on the assumption or belief of free, fair and open competition. Free, fair and open competition ensure that prices, remain low, and the quality of goods and services is maintained. In addition, the optimum product that is demanded by the market is produced. The laws are enacted to curb anti-competitive behavior by firms in a market; especially big firms.
In some instances, antitrust laws can be referred to as competition laws as they directly, and in some cases indirectly, prevent firms from behaving in a dominant manner. The case of antitrust laws is majorly seen in an oligopoly market. To maximize profits, some firms in an oligopolistic market use unfair methods; at the expense of other competitors. In some instances, the firms act in a manner suggesting their ability to hold the market at ransom. The term antitrust mainly applies in the precincts of the United States of America.
In other countries, the laws are referred to as antimonopoly or competition laws. However, in both instances, the laws serve the same purpose. Generally, antitrust laws engage in prohibiting firms from engaging in wrongful conduct, mergers and acquisition likely to lead to reduced competition, and agreements that would lead to restraint in trade (Posner, 2001). In some instances, they deter firms wishing to obtain monopolies; using unorthodox means. This paper aims at looking into the history of antitrust laws, their economic impact, and some applications in the real life.
History/Background of Antitrust Laws The usage of the term antitrust laws can be termed as having its origins in the year 1890. Prior to this period, the only antitrust laws that existed were contractual agreements. The contractual agreements were based on common law of that era. The contracts were supposed to restrain unfair trade dealings. Some of the dealings that were considered to be unfair included those related to price fixing agreements. However, the contracts could not be enforced by the law.
In addition, the laws did not sanction any party to legal reprimands; monopolies also were not illegal. It was at this time, in 1890, that there was the adoption of the Sherman Act. The Sherman Act was aimed at regulating the development of trusts. In this era, trusts were being used by competitors, so as to run the markets as monopolies. Through the use of trusts, firms could be able to coordinate their activities. Monopoly would ensure that the firms could be able to control the market prices, and at the same time, shield off competition from entering into the market.
The act, Sherman, declared unlawful any agreement or conspiracy that would result into a restraint of business operations (Posner, 2001). The business operations, in this case, were those pertaining to states or countries. In the year 1914, the Clayton Antitrust Act was established. The trust was later amended in the year 1936 by the Robinson-Patman Act. The Act prohibited the discrimination of consumers by firms.
The discrimination reflected in this act included those that were related to consumer price discrimination. In addition, mergers and acquisitions that would kill competition in the market were disallowed. The competition did not need to be fully reduced, a substantial reduction of competition was also considered illegal. The act, Clayton, empowered individuals to carry our private suits and triple damages (in relation to antitrust). In addition, labor organizations were expressly exempted from the antitrust laws (Posner, 2001).
Reasons for Antitrust Laws There are various reasons that necessitate for the enactment of the antitrust laws. However, the overall aim of the antitrust laws is to ensure the continued competition in the market. Competition is assumed to reduce exploitation of consumers by firms. Antitrust laws restrict unfair competition by regulating mergers and acquisition, dominance, price discrimination, and collusions (cartels). Some of the unfair competition methods are discussed below.
Mergers and Acquisition Mergers and acquisition mainly signify the coming together of firms to form one strong firm. The one firm would have a stronger amount of power in relation to the market operations. In some instances, where there a few number of firms, mergers and acquisition could lead to the formation of a monopoly. The terms, merger and acquisition, are used to express the same occurrence. However, both have different meanings; though having the same end product. Mergers refer to a situation, whereby two firms come to an agreement to operate as one; as opposed to remaining separate.
Mergers usually occur in the case of firms that are of the same size. This type of merger forms a merger, normally referred to as a merger of equals. The individuals stock of the parent companies cease to exist at the formation of a merger; new stocks are issued. An exampl of a merger is the case of Chrysler and Daimler-Benz; leading to the formation of DaimlerChrysler. On the other hand, acquisition refers to the situation, whereby one firm completely takes over the operations of another firm.
The company taking over the other establishes itself as the sole owner; after purchasing the other firm. The company that was purchased ceases to exist; but the stock of the buyer’s company does not cease to exist (Kirkwood, 2004). However, in some instances, the aim of mergers and acquisition is not always for the benefit of the consumer. Some mergers and acquisitions are instituted by firms, so that they can be able to control the market, and in so doing, be able to control prices. A control in prices would leave firm making supernormal profits at the expense of the consumer.
In this perspective, antitrust laws apply to ensure that there is no exploitation of any one side. The laws are meant to ensure that mergers and acquisitions are not formed; particularly those that would lead to reduced competition in the market. Before an acquisition is incepted, the responsible bodies determine whether the new firm that is formed leads to reduced competition in the market. Ultimate control of competition in a market would ensure that a firm controls a market. In extreme cases, a monopoly is formed.
A monopoly is termed inefficient, due to its ability to control the total output for an industry (Kirkwood, 2004). In most cases, monopolies produce output at a lower level than the market demand. This allows the monopoly to charge higher prices. Consumers end up suffering from the high prices and the below optimum output produced. The phenomenon of a monopoly is illustrated below.
The resultant monopoly created would charge higher prices than necessary. The price determined by economic forces is P. However, due to the new power, the firm charges a higher price at PM. This higher price charged leads to a reduction in the overall output; in the market. Instead of the firm producing at the point where output is equal to Q, the firm produces at QM. At this point, there is a loss in the social welfare, as the resources are not used to their optimum ability.
Overall, antitrust laws ensure that this does not occur by deterring the formation of excessively strong firms; reducing competition. Market Dominance Antitrust laws also deter the ability of firms to dominate markets. Domination by markets would create inefficiency in the market. Dominant firms, in most cases, have control over a huge part of the market. This enables them to dictate a lot in the market. In the case of antitrust laws, they deter market leaders from using dirty or unorthodox methods in gaining big market shares.
Most firms try to gain large market shares, so that they can be able to dictate market factors. An epitome of this is the recent case of Intel Corporation. Intel is the major world’s leader in the production of computer microchips. Due to this factor, Intel tried to use unorthodox means to try and capture a huge part of the market share. Some of the methods that Intel used included threats to leading computer manufacturers, and bribes.
The corporation threatened to stop its supply of microchips to computer manufacturers. This would enable Intel to be able to push other competitors, like Advanced Micro Devices (AMD), out of the market (Reuters, 2012). In addition, Intel would be able to control the market prices. This would leave other small firms being price takers (thus behaving as perfect competitors) in an oligopolistic market. It was only after the government intervened that Intel backed down from its behavior.
In this scenario, antitrust laws that prevented unfair competitive methods were applied. In the case of dominance of a single firm, the dominance is usually expressed in the form of price leadership. Price leadership is a situation, whereby an individual firm is able to dictate the prices in a market. Price leadership is assumed to be detrimental to the welfare of the consumer; as it usually leaves the consumers worse off. This is usually because the dominant firms set prices at a level that is usually higher than the price dictated by the market forces.
The phenomenon of price leadership is illustrated by the graph below. MCF-Sum of the marginal cost curves for small firmsMCl-Marginal cost curve of the leading firm DT-Demand for the entire industry DL-Leading firm’s demand curve MRL-Marginal revenue curve of leading firm QL-Output for the leading firm QT-total output for that industry> The dominant firm sets the price at the level at the level PD. If the firm was to set the price at PE, then the smaller firms would supply all the quantity. However, the firm sets the price at a lower level (PD). However, the price set by the market leader is sometimes higher than the equilibrium price.
This would leave the consumer worse off. In some instances, the dominant firm could use the power of price control to drive smaller firms in the market. This can be done through the setting of a price lower than the equilibrium price. The setting of a price lower than the equilibrium price would leave the smaller firms incurring losses. However, the market leader is able to market a profit through the concept of economies of the scale. The economy of scale states that firms can reduce the production costs by producing in bulk.
In case of dominant price leadership, there is nothing that small firms can do. The only solution would be to start a price war; which they cannot sustain against the larger firm. In this case, antitrust laws chip are to protect the small firms; and ultimately the consumers. The letters deter the big firm from initiating unfair competition in the market. Price Discrimination Price discrimination is a situation, whereby firms charge different prices for the same product.
The producer uses different methods of categorizing consumers, so as to make profits. This is an unfair practice, since it allows the firm to make super normal profits by charging different consumers the maximum amount that they would sacrifice. In this case, antitrust laws protect consumers from this unfair treatment. This treatment can be termed as an exploitation of the consumer by the respective firm or firms. Without protection, consumers would be utterly left at the mercy of the firms. Firms would in turn use all the available ways to try and maximize their profits.
Economic Views of Antitrust LawsThere are divergent views regarding the issue of antitrust laws in the field of economics. Over the ages, different economists reiterated their views on the issue of antitrust. According to classical economists (led by Adam Smith), antitrust is an unnecessary hindrance to the wellbeing of the market. Classical economists believed in the doctrine of Laissez-faire. Laissez-faire is a French word which means, broadly, let it be. Under the doctrine, transactions in the market were to be allowed to continue without the intervention of the state.
They advocate for competition among the different firms. According to their arguments, market forces would deter individual firms from raising their prices. This is because a raise in prices would create opportunities for other firms to enter into the market. The entrance into the market by other firms, due to high profits, would eventually erode the monopoly. In this perspective, the dominance of the firm would end.
They, therefore, advocated for the government to let the market forces do their work. Therefore, according to classical economists, antitrust laws equated to a nuisance and restriction of an economy’s prosperity. Later on, a group of economists largely associated with the University of Chicago advocated for an approach to competition law, guided by the suggestion that not all actions are anticompetitive. The actions they were referring to were those previously considered as being anticompetitive. The individuals, a combination of lawyers and economists, argued that some of the acts considered hindering competition actually ended up inducing competition (Kirkwood, 2004).
However, in my opinion, antitrust laws can be termed as being necessary to some extent. They are especially helpful in the event that firms engage themselves in unorthodox means in a bid to gain control of a market. However, in case of mergers and acquisitions, they can sometimes be a hindrance for the wellbeing of the market. According to Robert Bork, vertical integration of firms does not result into the firms having excessive control in the market. According to his research, none of the two firms that have integrated end up gaining in various, individual markets.
In case of monopolies, excessive control of their wellbeing ends up being a disadvantage. The reason for this is that in some cases monopolies end up producing more quality goods than in case of two individual firms. In conclusion, antitrust laws should exist to the extent that they do not end up creating inefficiencies in the market. Clear research should be carried out by the respective bodies before the introduction of antitrust laws. In addition, most laws that are in existence prevent competition.
None of the laws put into perspective the plight of the competitors. Economists should be involved in the creation and enactment of antitrust laws. This is because economists can be able to come up with laws that are able to ensure maximum employment of resources in the market, while at the same time protecting the wellbeing of the consumer.