Antitrust Acts Definition
Antitrust Acts are laws to scrutinize the Mergers and Acquisition activities and oversee that it doesn’t 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. Herfindahl index and the Concentration ratios are commonly used measures to gauge the level of concentration in a market and there are certain ranges that specify different actions to be taken up by the antitrust bodies if the company’s HHI falls in any of these ranges.
History
In the US, the Sherman Act of 1890 was the first act in the antitrust domain and was later combined with the Clayton Act of 1914 & Federal Trade Commission Act of 1914 do 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 entry. Further, it also prohibits the abuse of monopoly power. Clayton Act deals with the Merger and Acquisition transactions. Federal Trade Commission act has given laws under civil and criminal categories, of which the FTC deals with civil cases, and the Department of Justice takes up the criminal cases.
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 US. However, in different parts of the world, different Antitrust acts are in place.
For example, the antitrust act in India is known as The Competition Act, 2002, and is regulated by the Competition Commission of India. It came 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 US?
There are two enforcers of the antitrust laws in the US. The Federal government, along with the Federal Tax Commission, is one of the enforcers, and the US Department of Justice is another. In some cases, their roles and responsibilities overlap; however, in most cases, they are segregated. Therefore, before starting an investigation, there is an interdepartmental discussion between the two enforcers to prevent double effort.
One important point is the only the Department of Justice can take up cases of criminal nature. So if the FTC receives any such case, it has to transfer that to the Department of Justice. Further, within the civil segment, the FTC focuses on the high consumer spending sectors such as food, energy, healthcare, internet services, computer technology, among others.
Sections of 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 attempt to monopolize.
- Section 3 extends section 1 to US territories and the District of Columbia.
#2 – Three Important Sections of the Clayton Act are:
- Section 2 prohibits price discriminationPrice DiscriminationPrice Discrimination refers to the charging of different prices for the same type of products in different markets. It is a microeconomic pricing strategy, where the pricing mechanism depends upon the monopoly of the company, preferences of the customers, uniqueness of the product and the willingness of the people to pay differently.read more that can reduce competition.
- Section 3 prohibits those practices which exclude smaller firms to compete, such as predatory pricingPredatory PricingPredatory pricing is a pricing strategy in which the prices of products and services are set at such a low level that it becomes nearly impossible for others to compete in the existing market and forces them to leave.read more.
- Section 7 prohibits the merger of the purchase of shares that reduces competition or can create a monopoly.
#3 – Sections of Consumer Protection of the FTC Act are:
- Section 5(a) deals with unfair and deceptive acts of commerce and those affecting commerce.
- Section 18 gives the trade regulation rule, which treats the violators of section 5(a).
- Section 45(a) prohibits unfair methods of competition that violate the Sherman Act and the Clayton actClayton ActThe Clayton Antitrust Act is a United States antitrust law that was enacted in 1914 to prevent unfair and harmful trade practices that are unfair and harmful to the competitiveness of markets This Act was drafted by Henry De Lamar Clayton, and it was enacted during Woodrow administration.read more.
Advantages
- 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. This keeps a check on mergers, which can create monopolies and are not in the best interest of the consumers.
- Small Business Protection: Unfair practices such as predatory pricing, which force smaller businesses to get out of the industry, are checked. This maintains the supply of the product and healthy competition among the producers, keeping the price in the market competitive.
- 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
- Delays M&A Activities: If two very big firms file for a business combination, they require approval from antitrust authorities. Such approval is only given when both the firms are willing to give up some of their assets so that the monopoly is not created in the market, and the barriers to entry are not so great that no new firm can enter. This is a time-consuming process and, therefore, prevents the firms from quickly benefiting from the synergies of the combination.
- 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 doesn’t guarantee the approval and therefore is a sunk costSunk 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.
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