May 29, 2019
Antitrust Law: An Introduction
Concerns over economic concentration and the rise of
Key Antitrust Statutes
dominant technology platforms have recently generated
renewed congressional interest in antitrust law. This In
The Sherman Antitrust Act of 1890
Focus offers a brief introduction to antitrust by reviewing
Congress passed the Sherman Antitrust Act—the nation’s
the economic assumptions on which it is based and the key
first antitrust statute—in 1890 in response to concerns about
substantive provisions of the Sherman Antitrust Act of 1890
the power of large “trusts” like U.S. Steel and Standard Oil.
and the Clayton Antitrust Act of 1914.
The Sherman Act contains two main substantive provisions
Rationale for Antitrust Law
that prohibit agreements in restraint of trade and
monopolization, respectively. These provisions are
Contemporary antitrust doctrine is based on the idea that
enforced by the Antitrust Division of the Department of
economic competition optimizes the allocation of scarce
Justice (DOJ), the Federal Trade Commission (FTC), and
resources by inducing firms to adopt the most efficient
private plaintiffs.
production methods and price their products at or near their
costs of production. These virtues of competition are often
Section 1: Agreements in Restraint of Trade. Section 1
illustrated with the stylized hypothetical of a “perfectly
of the Sherman Act prohibits “[e]very contract,
competitive” market—that is, a market with homogenous
combination . . . , or conspiracy in restraint of trade or
products, many well-informed buyers and sellers, low entry
commerce.” Despite this broad language, the Supreme
barriers, and low transaction costs. In such a market, firms
Court has relied on the statute’s common law background
must price their products at their costs of production in
to conclude that Section 1’s prohibition applies only to
order to avoid losing their customers to competitors.
agreements that unreasonably restrict economic
competition. In applying this standard, the Court has
However, real-world markets often deviate from this
identified certain categories of behavior as categorically
textbook model of perfect competition. Some markets have
unreasonable and therefore per se unlawful. However, the
significant entry barriers. Many firms sell differentiated
Court analyzes most Section 1 claims under a standard
products that certain consumers prefer over competing
commonly known as the “Rule of Reason”—a totality-of-
products because of non-price considerations. And many
the-circumstances approach that asks whether a challenged
market participants face high transaction costs and
restraint is on the whole good or bad for competition.
information asymmetries. These sorts of structural
deviations from perfect competition give many firms
In applying Section 1, courts have distinguished
market power—the ability to profitably raise their prices
“horizontal”
above perfectly competitive levels. At the extreme, a
agreements between competitors in the same
market can be monopolized when a single firm possesses
market from “vertical” agreements between firms at
different levels of the distribution process. Courts have held
significant and durable market power. Moreover, even in
the absence of structural deviations from perfect
that certain horizontal restraints—such as “naked” price-
competition, firms can acquire market power and replicate
fixing and market-division agreements—are per se
unlawful under Section 1. Other horizontal restraints—
the effects of monopoly by agreeing among themselves to
including agreements to exchange information, professional
limit their competitive behavior.
standards-setting arrangements, and agreements that are
ancillary to a joint venture—are analyzed under the Rule of
According to standard justifications for antitrust, the
existence of significant market power harms both
Reason. By contrast, courts analyze vertical restraints (with
the exception of certain “tying” arrangements in which a
consumers and society as a whole. A firm’s exercise of
manufacturer refuses to sell a product unless a buyer also
market power harms consumers when it requires them to
pay higher prices for goods and services than they would
purchases another product) under the Rule of Reason.
pay in a competitive market. And a firm’s exercise of
Section 2: Monopolization. Section 2 of the Sherman Act
market power harms society as a whole by reducing output
(i.e., when prices rise, quantity demanded falls) and
makes it unlawful to monopolize or attempt to monopolize
“any part of the trade or commerce among the several
eliminating value that would have been enjoyed in a
States, or with foreign nations.” The Supreme Court has
competitive market. Contemporary antitrust doctrine is
focused on preventing these harms by prohibiting
made clear that the mere possession of monopoly power
and the charging of monopoly prices do not violate Section
anticompetitive conduct and mergers that enable firms to
2. Rather, a firm is guilty of monopolization only if it (1)
exercise market power.
possesses monopoly power in a properly defined market,
and (2) acquires or maintains that power through
anticompetitive conduct, as opposed to legitimate
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Antitrust Law: An Introduction
commercial behavior. Similarly, a firm is guilty of
anticompetitive conduct. This criticism appears to have
attempted monopolization when it (1) engages in
persuaded federal antitrust regulators, as the DOJ no longer
anticompetitive conduct, (2) with the intent to monopolize,
enforces the act’s price-discrimination provisions and the
and (3) has a dangerous probability of achieving monopoly
FTC does so only rarely. However, despite this decline in
power.
government enforcement, private plaintiffs retain the ability
to bring actions under Robinson-Patman.
Courts and commentators have struggled to formulate a test
for distinguishing anticompetitive conduct from permissible
Section 7: Mergers. Section 7 of the Clayton Act prohibits
commercial behavior. According to one inquiry known as
mergers that are likely to harm competition. Section 7
the “profit-sacrifice” test, conduct is anticompetitive when
applies to both “horizontal” mergers between competitors
it involves a sacrifice of short-term profits with the
and “vertical” mergers between companies that operate at
expectation that those profits will be recouped when rival
different stages in a distribution chain.
firms are eliminated from the market. Similarly, an inquiry
known as the “no-economic-sense” test posits that conduct
Horizontal merger analysis generally requires courts and
is anticompetitive when it (1) has a tendency to eliminate
regulators to define a relevant antitrust market in order to
competitors and (2) makes no economic sense but for that
assess whether a merger will harm competition. In brief, a
tendency. Another standard—the “equally-efficient-
properly defined market includes the relevant product and
competitor” test—condemns practices that are likely to
its substitutes—that is, other products that are “reasonably
exclude equally or more efficient competitors from a
interchangeable” with the relevant product. Specifically,
defendant-firm’s market.
two products likely compete in the same market if a
“hypothetical monopolist” of one product—that is, a
While the Supreme Court has not definitively endorsed a
hypothetical firm that is the only seller of that product—
single test for identifying anticompetitive conduct, some of
would be unable to profitably raise prices because of the
these standards can explain certain categories of behavior
sales it would lose to sellers of the other product. For
that the Court has identified as anticompetitive.
example, if a “hypothetical monopolist” selling coffee
Specifically, the Court has held that predatory pricing—that
would be unable to profitably raise its prices because of the
is, charging below-cost prices in order to drive competitors
sales it would lose to tea companies, then coffee and tea
from a market—is anticompetitive when a firm has a
likely compete in the same market. But if sellers of tea and
dangerous probability of recouping its losses by charging
other beverages do not discipline coffee sellers in this
monopoly prices once its competitors have been eliminated.
fashion, coffee may represent its own distinct antitrust
Similarly, courts have held that exclusive contracts with
market.
customers or suppliers, denying competitors access to an
“essential facility,” and filing frivolous lawsuits against
Once a market is defined according to these general
rivals can qualify as anticompetitive conduct in certain
principles, courts and regulators typically evaluate the
circumstances.
merged firm’s market share and the relevant market’s
concentration post-merger. If these inquiries and other
The Clayton Antitrust Act of 1914
factors suggest that a merger would harm competition (e.g.,
In addition to prohibiting a number of practices that are
by facilitating collusion or allowing the merged firm to
independently unlawful under the Sherman Act, the Clayton
profitably raise prices), the DOJ or the FTC may sue to
Antitrust Act of 1914 bars certain forms of price
block the merger. Proponents of the merger may contest the
discrimination and mergers that are likely to harm
government’s allegations by arguing that powerful buyers
competition.
or new entrants are likely to discipline its exercise of
market power, or by identifying merger-specific
Section 2: Price Discrimination. Section 2 of the Clayton
efficiencies that the combined company will realize and
Act (as amended by the Robinson-Patman Act of 1936)
pass on to customers.
prohibits certain forms of price discrimination, making it
unlawful for a seller to charge buyers different prices for
Vertical mergers raise different antitrust concerns than
commodities of “like grade and quality” when such
horizontal mergers. While vertical mergers are scrutinized
discrimination is likely to injure competition. Under the
less aggressively than horizontal mergers, they may raise
Robinson-Patman Act, competitive injury can consist of
competition concerns when a firm with significant power in
“primary line” or “secondary line” injury. Primary line
one market (e.g., widget manufacturing) enters another
injury occurs when a firm’s competitors are harmed by its
market (e.g., widget retailing). Such mergers may be
price discrimination (i.e., where a firm sells a commodity at
anticompetitive in cases where the resulting vertical
below-cost prices in certain regions in order to eliminate
integration would raise entry barriers in either market or
competitors while recouping its losses in other regions). By
deny competitors access to a needed input or distribution
contrast, secondary line injury occurs when a firm’s
channel.
disfavored customers are harmed by its price discrimination
(i.e., where a disfavored customer is placed at a competitive
Jay B. Sykes, Legislative Attorney
disadvantage relative to a price-discriminating firm’s
IF11234
favored customers). While the Robinson-Patman Act
remains good law, many commentators have advocated its
repeal, arguing that its compliance costs outweigh the
limited instances in which the act prohibits truly
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Antitrust Law: An Introduction
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