Antitrust Defined

By Reem Heakal AAA

In the spirit of free trade and competition, efforts have been made since the late 19th century to put an end to 'big business', or monopolies, that dominate the local and foreign market share, control prices and/or prevent competition. Here we take a look at the history of antitrust laws and examine some of the arguments against them.

General Background: the Rise of Consolidation
Before any legislation deemed monopolies illegal in the United States, an act was passed in England in 1624 preventing the Crown from granting monopolies to businesses in return for cash. The Statute of Monopolies made the practice illegal, thus helping ensure an efficient economy.

By the 19th century, the U.S. was starting to experience what came to be known as big businesses. In the age of industrialization the emergence of the railroad allowed for the first real form of mass transportation. This meant that people and businesses could coordinate themselves within one day over distances that previously were never manageable. Over time, transportation competition began to rise and railroads eventually turned to consolidation in order to deal with decreasing profits.

Consolidation continued in the 19th century as businesses faced increasing competition. With the intention of controlling prices, competing businesses coordinated prices in order to minimize competition and increase profit. In essence, it was a form of monopolization as companies consolidated their operations in the market.

Standard Oil
It wasn't until the case of John D. Rockefeller's Standard Oil in 1882 that big business became an issue that the public needed to confront. Standard Oil merged with its competition by forming the Standard Oil Trust.

This was basically the establishment of what is known now as a board of trustees. (With time, Standard Oil heralded the idea of a holding company, which functioned as a board of trustees). These trustees became legally responsible for all assets and properties of Standard Oil and the merged companies. Stockholders received trust certificates, each of which represented 20 shares of Standard Oil), and all profits made from the nine component industries of the trust were sent to the trustees, who would then determine the dividends. The trustees were responsible also for appointing all directors and managers of the company, thereby solidifying their control over Standard Oil and fundamentally, the industry.

Prices across the whole industry were essentially being directed by one entity. Any other company not a part of Standard Oil's trust was unable to compete against the monopolistic giant, and was therefore unable to enter the industry. Standard Oil Trust could basically run out any rival business by setting a lower price that would be impossible for a single-entity company to operate on.

By this time, the public was witnessing limited competition and restrictive price controls in two industries: in the railway industry, by American Railway Union, and in the oil industry, by the Standard Oil Trust. These two entities spurred public discontent, which in turn led to a reaction to control big business and monopolistic practices.

The Sherman Antitrust Act
John Sherman, Ohio lawyer and senator, was compelled to draft the Sherman Antitrust Act of 1890. The act's primary goal was to limit the expansion of monopolies, the restriction of free trade (competition) and the imposition of price fixing by industry members or any combination of business practices that led to the restriction of trade.

However, the terms "restraint of trade", "combination" and "monopolize" were not properly defined, turning the act into a vague and weak legislation. In addition, there was no independent commission established at the time to investigate possible antitrust cases, making the act difficult to enforce.

The Clayton Antitrust Act
In 1914, a new act was passed by lawyer Henry De Lamar Clayton of Alabama and was called the Clayton Antitrust Act. It aimed to reinforce the Sherman Act by giving the government more power when faced with monopolies. It strictly outlawed companies from engaging in price-fixing agreements to lessen competition. The act also prevented individuals from serving as directors at competing companies.

AT&T and the Evolution of Antitrust
The American Telephone and Telegraph Corporation (AT&T), set up in 1885, was the first company to offer long-distance phone services across the U.S. In the meantime, Alexander Graham Bell, (who had a patent on the telephone until 1894), created a company with his financiers, called American Bell Telephone (changed from the previous names of Bell Telephone Company and National Bell Telephone Company). For some time after Bell's patent expired, American Bell managed to ward off competition through price fixing and aggressive mergers with competitors.

By December 1899, AT&T bought American Bell and grew as it acquired stock in other companies providing telephone services. Eventually, it became the nation's primary telephone service provider, and it proposed to establish itself as a monopoly. The proposal was agreed upon by the government in 1913 through the Kingsbury Commitment.

Over the years, AT&T (a.k.a. "Ma Bell") enjoyed almost a complete monopoly over long-distance telephone services, while also controlling 22 local telephone service providers across the country. And while there was competition, the size and influence of AT&T essentially made the company a monopoly through and through.

Long-distance competition was introduced by the Federal Communications Commission (FCC) by 1975, ending Ma Bell's monopoly in that area. Meanwhile, a 1974 antitrust lawsuit brought upon by the Department of Justice was finally settled in 1982, forcing Ma Bell to break up her monopoly completely and divest of her local telephone service providers. The local providers were reorganized into seven independent, regional Bell operating companies, commonly known as "baby bells".

The Price of Success
Arguments have been made that antitrust lawsuits often punish successful businesses. These arguments say that companies that have been deemed monopolies - such as Microsoft - as opposed to "harmful" monopolies created by the government - such as the old AT&T - are in reality being punished for their success, which comes not from wiping out competition but from the inability of rival companies to be efficient enough to compete.

Thus, the inefficiency of smaller competitors is actually being rewarded when antitrust laws are enacted, while successful big businesses must endure restrictions on their productivity, competitiveness and efficiency. The argument goes on to state that competition in some industries under scrutiny does in fact continue to exist: if, for example, a client does not want to buy Microsoft, he or she can always turn to another alternative such as Apple.

Conclusion
Nonetheless, antitrust laws remain adaptable to time and legal opinion. It therefore difficult to strictly define what is legal and illegal when it comes to big business, and often it is safer for companies to seek legal approval from the Department of Justice before concluding a merger that may cause it to be labeled as monopolistic or anti-competitive.

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