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Antitrust Law: Definition, Types & Outline

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  • 0:01 What Is Antitrust Law?
  • 3:40 Antitrust Acts
  • 6:10 Lesson Summary
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

Antitrust laws are statutes developed to protect consumers from rapacious business practices by making it illegal for businesses to compete in unfair ways.

What Is Antitrust Law?

Antitrust law is a set of statutes developed to regulate competition between companies, mainly to ensure that businesses are engaging in fair competition. The purpose of these laws is to protect consumers from greedy business owners.

It all started back in the 1800s with government intervening in what they believed was unfair competitive practices amongst a handful of business owners. It was thought that if a few companies were able to control the market share, or the percentage of the total amount of revenue generated from the sale of a product that is held by one single company, it would impact competition. Only a few companies would have the highest market share, leaving little to no room for others to enter into the market.

You see, competition is the struggle between businesses for the same set of consumers. For the most part, it is fair. Businesses use strategies to entice a consumer to try their products or services, hoping to gain a long-term customer.

However, there are times when companies conspire to alter competition in their favor. When this happens, other competing businesses and individual customers are affected. It can be higher prices, less availability of desired products or services or even create a monopoly, which is a total market share taken by one single company, making it impossible for other competitors to make a fair buck.

Other ways businesses can alter competition are:

  • Market allocation
  • Bid rigging
  • Price fixing

Market allocation involves two companies conspiring to divide a market in order for two businesses to sell similar products at higher prices to drive away competition. For example, Acme Meat Packing, Inc. and Beefy Meat Packing want to be the only two beef distributors in a large city.

So, Acme and Beefy agree to split the list of those who purchase beef products and each company will sell only to the customers on their list. Neither company will sell to businesses on the other company's list. In fact, they may even quote higher prices to avoid making a sale.

While it may sound crazy to engage in market allocation, it actually makes sense. If two companies service all of the businesses in a region by maintaining low prices, no other competition can enter into the market.

Another way companies can skew competition is by engaging in bid rigging. This happens when two or more companies agree to price bids unfairly.

An example may help. Bill's Plumbing Service, Joe's Plumbing Service and Pepe's Plumbing Service agree to bid on every plumbing project for the city. Bill and Joe enter a really high bid, while Pepe comes in low. Naturally, the city chooses Pepe's bid. Next time, Bill will come in low while Pepe and Joe come in with higher bids. The idea behind this scheme is to make one single bid look much more attractive. Eventually, all three plumbers will receive an offer.

Sometimes, two companies get together to set prices so that both receive an equal market share. Price fixing happens when two companies set higher than average prices for a product that is only available for purchase by the two companies. By setting the same price, customers will not be motivated to be loyal to one store over another. Now, if both companies set higher than usual prices for the same product, customers will not have a choice but to make the purchase from one of the two companies. These actions can prove devastating to small business or, even worse, the economy as a system. Government intervention is imminent.

Antitrust Acts

One way the government intervened was to create the Sherman Antitrust Act. This act was written in the 1800s to prohibit manipulation of markets and stop monopolies.

A good example of this happened with Kodak, the camera and film company. The company was selling both Kodak brand and private label brand cameras and film. This gave Kodak a strong market share of the industry. This brought about a lawsuit because Kodak became one of the only (and the largest) seller of these products.

In response to this, Kodak developed Kodacolor film. Only Kodak could develop this film. They even charged a special fee above the processing fee for developing photos. This was in violation of the Sherman Antitrust Act because it created a monopoly for the company. Following a lawsuit, the company was forced to license the equipment to other companies, giving customers a choice where to develop their photos.

The Clayton Antitrust Act made it illegal to engage in price discrimination or make exclusive deals and allows for private lawsuits, labor union organization and regulation of mergers. Let's break it down. Price discrimination refers to charging different prices to customers in the same area. For example, Tony's Tomato Sauce Company cannot charge a significantly higher price to certain pizzerias and less to others in the same market.

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