Antitrust Acts

Article byShraddha Sureka
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

Antitrust Acts Definition

Antitrust acts are laws to scrutinize the mergers and acquisition activities and oversee that it does not lead to one player becoming too big among its peers so that it has the power to take up predatory business policies. It is also known as competition laws. One uses Herfindahl-Hirschman Index and the concentration ratio to gauge the concentration level. Certain ranges specify different actions to take by the antitrust bodies if the company’s Herfindahl-Hirschman Index falls in any of these ranges.

Key Takeaways

  • Antitrust acts refer to the laws that analyze mergers and acquisition activities and manage that only lead to one player becoming smaller among its peers. 
  • Antitrust acts are also known as competition laws. 
  • In the U.S., the Sherman Act of 1890 was the first act in the antitrust domain. They combined it with the Clayton Act of 1914 and The Federal Trade Commission Act of 1914 to make antitrust laws comprehensive set.
  • Antitrust Acts are three critical sections of the Clayton Act, three-quarters of the Sherman Act, and areas of Consumer Protection of the FTC Act.

History

In the U.S., the Sherman Act of 1890 was the first act in the antitrust domain and was combined with the Clayton Act of 1914 and The Federal Trade Commission Act of 1914 to form a comprehensive set of antitrust laws.

Sherman ActSherman ActSherman Antitrust Act is the legislation enacted by the US Congress to tackle monopolistic tendencies that reduce competition and interfere with trade and commerce. It prohibits deliberate or inorganic attempts to make competition unfair but not organic growth or monopolies formed through genuine means.read more deals with market functioning and prohibitions of practices such as cartelsCartelsA cartel is a group of producers of goods or suppliers of services formed through an agreement amongst themselves to regulate the supply of goods or services with the basic intent to illegally regulate the prices or restrict competition regarding the said goods or services.read more or collusion, which hamper free competition by creating high barriers to entryBarriers To EntryBarriers to entry are the economic hurdles that a new entrant must face in order to enter a market. For example, new entrants must pay fixed costs regardless of production or sales that would not have been incurred if the participant had not been a new entrant.read more. Further, it also prohibits the abuse of monopoly power. The Clayton Act deals with merger and acquisitionMerger And AcquisitionMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more transactions. Finally, the Federal Trade Commission Act has given laws under civil and criminal categories. The Federal Trade Commission Act deals with civil cases, and the Department of Justice takes up criminal cases.

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Antitrust Acts Example

As explained in the history section, the Sherman Act, the Clayton Act, and the Federal Trade Commission Act form the Antitrust Act in the U.S. However, different Antitrust acts exist in other parts of the world.

For example, the antitrust act in India is known as The Competition Act, 2002. The Competition Commission of India regulates after replacing the Monopolies and Restrictive Trade Practices Act, 1969.

Similarly, in Canada, the law is again known as The Competition Act, governed by the Competition Bureau, which involves cases of civil and criminal nature, and the Competition Tribunal is the adjudicating body.

Who Enforces the Antitrust Laws in the U.S.?

There are two enforcers of the antitrust laws in the U.S., Along with the Federal Tax Commission, the Federal government enforces, and the U.S. Department of Justice. In some cases, their roles and responsibilities overlap. However, in most cases, they segregate. Therefore, there is an interdepartmental discussion between the two enforcers to prevent double efforts before starting an investigation.

One important point is that only the U.S. Department of Justice can take up cases of criminal nature. So, if the Federal Tax Commission receives any such incident, it must transfer that to the Department of Justice. Further, the Federal Tax Commission focuses on high consumer spending sectors such as food, energy, healthcare, internet services, and computer technology within the civil segment.

Sections of Antitrust Acts

Antitrust Acts

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Source: Antitrust Acts (wallstreetmojo.com)

#1 – Sherman Act has Three Sections:

  • Section 1 prohibits those agreements which create a restraint on free trade. For example, price-fixing or refusing to deal.
  • Section 2 forbids monopoly or attempts to monopolize.
  • Section 3 extends Section 1 to U.S. territories and the District of Columbia.

#2 – Three Important Sections of the Clayton Act are:

#3 – Sections of Consumer Protection of the Federal Tax Commission Act are:

Advantages

  1. Keeps a Check on M&A Activities: If two very big firms file for a business combinationA Business CombinationA business combination is a type of transaction in which one organization acquires the other organization and therefore assumes control of the other organization's business activities and employees. In simple terms, it is a consolidation of two or more businesses to achieve a common goal by eliminating competition.read more, they will have to get approval from the antitrust authorities. It checks on mergers, which can create monopolies and are not in the best interest of the consumers.
  2. Small Business Protection: Unfair practices such as predatory pricing, which force smaller businesses to get out of the industry, are checked. It maintains the supply of the product and healthy competition among the producers, keeping the price in the market competitive.
  3. Market Efficiency: If monopolies are restricted, the firms produce at close to efficient levels of production, and therefore, lead to lower deadweight lossDeadweight LossWhen the two fundamental forces of Economy Supply and Demand are not balanced it leads to Deadweight loss. Deadweight loss could be calculated by drawing a graph of demand and supply. read more and higher consumer and producer surplus.

Disadvantages

  1. Delays M&A Activities: If two very big firms file for a business combination, they require approval from antitrust authorities. Such consent is only given when both firms are willing to give up some of their assets so that a monopoly is not created in the market, and the barriers to entry are not so great that no new firm can enter. Moreover, it is a time-consuming process. Therefore, prevents the firms from quickly benefiting from the synergies of the combination.
  2. Additional Expense: The firms have to pay for the fee and charges of the antitrust application and approval process, which can be very high and do not guarantee approval and therefore is a sunk cost Sunk CostSunk costs are all costs incurred by the firm in the past with no hope of recovery in the future and are not considered while making any decisions since these costs will not change regardless of the decision's outcome.read more.

Frequently Asked Questions (FAQs)

What did the Sherman and Cayton Antitrust Act accomplish?

The Clayton Antitrust Act was implemented by the Federal Trade Commission, which also prevented unfair business practices. The new law declared strikes, boycotts, and labor unions permissible under Federal law in addition to outlawing price discrimination and anti-competitive mergers.

What did the Antitrust Act do?

To restrict power combinations that interfered with trade and diminished financial competition, they first implemented the Sherman Antitrust Act in 1890. It forbids attempts to monopolize trade in the United States and formal cartels.

Did Sherman Antitrust Act work?

For more than a decade after its passage, the Sherman Antitrust Act was often imposed only against industrial monopolies and not favorably. It is only effective for several years against labor unions conducted by the courts as an unethical blend.

Who made the Antitrust Act?

John Sherman suggested and passed it in 1890. The act signaled a significant shift in American regulatory strategy toward business and markets. The Clayton Antitrust Act amended the Sherman Act in 1914, which addressed particular methods that the Sherman Act did not prohibit.

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