An Antitrust Primer

The antitrust laws describe unlawful practices in general terms, leaving it to the courts to decide what specific practices are illegal based on the facts and circumstances of each case.

• Section 1 of the Sherman Act outlaws "every contract, combination . . . , or conspiracy, in restraint of trade," but long ago, the Supreme Court decided that the Sherman Act prohibits only those contracts or agreements that restrain trade unreasonably. What kinds of agreements are unreasonable is up to the courts.

• Section 2 of the Sherman Act makes it unlawful for a company to "monopolize, or attempt to monopolize," trade or commerce. As that law has been interpreted, it is not necessarily illegal for a company to have a monopoly or to try to achieve a monopoly position. The law is violated only if the company tries to maintain or acquire a monopoly position through unreasonable methods. For the courts, a key factor in determining what is unreasonable is whether the practice has a legitimate business justification.

• Section 5 of the Federal Trade Commission Act outlaws "unfair methods of competition" but does not define unfair. The Supreme Court has ruled that violations of the Sherman Act also are violations of Section 5, but Section 5 covers some practices that are beyond the scope of the Sherman Act. It is the FTC’s job to enforce Section 5.

• Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect "may be substantially to lessen competition, or to tend to create a monopoly." Determining whether a merger will have that effect requires a thorough economic evaluation or market study.

• Section 7A of the Clayton Act, called the Hart-Scott-Rodino Act, requires the prior notification of large mergers to both the FTC and the Justice Department.

Some cases are easier than others. The courts decided many years ago that certain practices, such as price fixing, are so inherently harmful to consumers that a detailed examination isn’t necessary to determine whether they are reasonable. The law presumes that they are violations (antitrust lawyers call these per se violations) and condemns them almost automatically.

Other practices demand closer scrutiny based on principles that the courts and antitrust agencies have developed. These cases are examined under a "rule of reason" analysis. A practice is illegal if it restricts competition in some significant way and has no overriding business justification. Practices that meet both characteristics are likely to harm consumers -- by increasing prices, reducing availability of goods or services, lowering quality or service, or significantly stifling innovation.

The antitrust laws are further complicated by the fact that many business practices can have a reasonable business justification even if they limit competition in some way. Consider an agreement among manufacturers to adopt specifications that require fire-resistant materials for certain products. The set of specifications may be called a standard. The agreement to adopt the standard is restrictive: the manufacturers have limited their own ability to use other materials, and they have limited consumer choice. But the agreement to adopt the standard may benefit consumers in that it provides assurances of safety.

What if manufacturers did not use a uniform standard for electrical outlets and plugs? The likely result would be incompatibilities between parts produced by different manufacturers. But because of the standard, parts manufactured by different companies become interchangeable; competition for the parts increases, and prices go down.