Sherman Antitrust Act

Updated on May 24, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What Is The Sherman Antitrust Act?

Sherman Antitrust Act refers to the legislation enacted by the U.S. Congress to tackle monopolistic tendencies that reduced competition and interfered with trade and commerce. The act prohibits deliberate or inorganic attempts to make competition unfair but does not restrict organic growth or monopolies formed through actual means. The act is named after then-U.S. Senator John Sherman of Ohio.

Sherman Antitrust Act

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The Sherman antitrust act fines are charged for unethical activities like price fixing, market allocation amount competing parties, and bid rigging. The act is called “antitrust” as it was curated to act against the unethical and hurtful policies set by trusts that became highly prevalent in the 19th century.

Key Takeaways

  • Sherman Antitrust Act is the legislation the U.S. Congress performs to overcome monopolistic tendencies that lessen competition and intervenes with trade and commerce.
  • This act restricts intentional or manufactured tries to make competition unfair but does not prohibits natural growth or monopolies formed through actual means. It is named after then-U.S. Senator John Sherman of Ohio.
  • It is an excellent opportunity for private companies to avoid the process engaged in the IPO process and a practical method for companies to get publicly listed on the stock exchange.

Sherman Antitrust Act Explained

The Sherman antitrust act is a resolution passed in the United States which enables free trade without manipulation by a few players in the market. It blocks the possibility of forming a monopoly through unethical means. However, the formation of a large market share for an organization through organic means is encouraged.

The Sherman Antitrust Act received tremendous support from the public and small producers and competitors. Consumers were exploited through high prices & limited supply, and competitors were disgruntled over the behavior of large corporations to keep them out of the market.

Therefore, the Sherman Antitrust Act significance is that it helped the consumers by promoting competition and the corporations by clearing the blockade preventing them from entering and establishing themselves in the market.

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Purpose

Let us understand the purpose of Sherman Antitrust Act significance and other such implications through the brief discussion below.

  • Prevent monopoly – This act prevents any kind of conspiracy in trade or any act of monopoly in the interstate trade and commerce. This prevents power concentration in the hands of few dominant firms, leading to rise in prices, restricted consumer choice, etc.
  • Promote competition –  The act’s main purpose was to provide a level playing field to all players in the market so that no one was advantaged or benefited by hiding behind the law of that time. This creates competition and prevents price fixing, bid rigging or collusion, increasing the customer base.  
  • Antitrust law enforcement – It aims to promote and enforce any kind of antitrust law and if required, take legal action against the firms or individual who try to go against competition. Sherman Antitrust Act  purpose is to provide a legal foundation for identifying and punishing those who violate the law.

Thus, it plays a very important role in shaping the economy in terms of competition, legislation, consumer support and satisfaction and industrial development.

Sections

The three major sections that compile to create the Sherman antitrust act significance are as follows:

Section 1 – Trusts, etc., in restraint of trade illegal.

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared illegal.

This section prohibits activity that leads to altering prices, bid-rigging, etc., that affect the organic nature of trade and commerce.

Section 2 –  Monopolizing Trade a Felony

Every person who shall monopolize, attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.

Section 2 addresses the issue of monopolizing through unfair means and promoting anti-competitive activities.

Section 3 – Extends the recommendation and guidelines of Section 1 across U.S. territories.

History

During late 1800, the US became one of the largest manufacturers of goods globally. Many of the industrialists rode on the back of the industrial revolution creating giant companies and monopolies in their respective sectors like oil, steel, etc.

But soon, the public and regulators experienced the abuses of these monopolies in terms of pricing and supply of goods, poor working conditions, and less pay. People feared the domination of companies such as Standard Oil in the market and their acts of preventing competition from organizing.

Regulators wanted to promote competition to break shenanigans of the corporations and encourage the free market.

Many states undertook an initiative to curb monopolies by imposing restrictions on a company owning shares in another company. Still, smart corporations made their way through establishing trusts and controlling the overall market.

Moreover, the laws were applicable only within the state or intrastate, making them less effective.

Therefore, in response to all such violations, Senator John Sherman of Ohio introduced legislation to promote competition and stop unfair trade practices. This legislation came to be known as the Sherman Antitrust Act of 1980.

The Sherman antitrust act fines gave the federal government the power to dissolve or declare trust illegal if it were to be found doing unfair trading to create monopolies.

Examples

Resolutions and concepts such as the Sherman Antitrust Act purpose can be understood better with the help of a few practical examples. Let us understand the concept in depth with the help of a couple of examples.

Example #1

Let us take a Sherman Antitrust Act  example with Fab Fabrics Ltd., a manufacturing company introduced a competitive product in the market in the form of pure cotton cloth which can be used to make shirts, curtains, dresses, and so on after basic dying.

Their competitors also had similar products and sold them at a premium to make the most of the limited competition in the market.

Fab Fabrics decided to take advantage of the same factor and crushed the prices to the bare minimum. At one point, it made $10 profit per roll whereas its competitors made over $100 dollars in profit.

As a result, their competitor filed a lawsuit against them for attempting to create a monopoly through unethical means and price fixing.

Example #2

Nine states in the United States have registered a case with the Department of Justice against the tech giant Google’s parent company Alphabet for monopolizing the digital advertisement space. The addition of these nine cases makes the cases against the tech giant similar reasons to 17.

The states accused and requested Sherman antitrust act fines to be awarded to Google for violating sections 1 and 2 of the act for drafting anti-competitive contracts and attempting to monopolize the digital advertising business.

Given that Google has access to a large database, it has been accused of misusing it and breaching the privacy of its users in the past as well.

The above Sherman Antitrust Act  example clearly explain the significance of the law.

Effect

Let us understand the effect of the act had on businesses and the economy on the whole through the discussion below.

Several trusts and companies were tried under this act for unlawful practices. The act was used to dissolve Northern Securities Company in 1904 and was used again in 1911 against Standard Oil Company and the American Tobacco Company. Further, in 1990 the government-initiated action against software giant Microsoft to prevent competition through forbidden practices.

The passing of this Antitrust act paved the road for more strict and effective laws like the Clayton antitrust act. It strengthened the former act and covered activities outside the purview of the Sherman act.

Sherman Antitrust Act Vs Clayton Antitrust Act

Both the above laws aim at promoting healthy competition and prevent anti-trade practices. But there is a significant difference between the two, which are given below:

  • The former prevents overall conspiracy or combination of unfair an dunreasonable trade practice but the latter prevents certain specific anti–competitive practices.
  • The former does not have any special provision for merger or acquisition. Still, the latter has some unique and more strict requirements and criteria for determining if an acquisition may eliminate competition or promote the unlawful practice.
  • The former empowers the US government with some antitrust laws and help in promoting legal action against firms that indulge in Sherman Antitrust Act violations it but the latter grants such rights to the competitors or consumers. It empowers them to file lawsuit against the organizations in the federal court.

Thus, both the acts help Clayton Antitrust Act and Sherman Antitrust Act violation and combat antitrust practices and implement the legal procedures for managing the same.

Frequently Asked Questions (FAQs)

How did the Sherman antitrust act harm business?

Though this act was established to promote business. However, some firms and industry groups have argued that the law has had unintended negative consequences for the economy and individual companies.

What made the Sherman Antitrust Act so ineffective?

There are several reasons why this act has been criticized. Some factors contributing to the law’s perceived limitations include weakness in the legal framework, limited enforcement sources, political pressure and influence, globalization, and new business model.

How successful was the Sherman Antitrust Act?

The success of this act has been subject to debate over the years. Some believe that the law has successfully promoted competition, and few believe that the show has been ineffective in preventing anti-competition. Despite the criticism, this act has been an essential tool In the U.S.

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