Antitrust Definition

Antitrust refers to government policy to regulate or break up monopolies in order to promote free competition and attain the benefits that such competition can provide to the economy and to society as a whole.

Monopoly is the situation in which there is a single provider of a product (i.e., a good or service) for which there are no close substitutes. Free competition is the situation in which multiple companies offer identical or similar products and compete solely on the basis of price and quality, including the quality of any services that are associated with the products (e.g., packaging, delivery and warranties).

Among the harmful effects of monopoly as compared with free competition are higher prices, a lower level of output, reduced quality, an inferior level of service associated with the product(s) supplied by the monopolist, slowing down the rate of technological advance1 and corrupting the political system. Moreover, monopolists frequently attempt to use their market dominance for one product to extend it to other products, which is termed abuse of monopoly power.

Thus, there are very compelling reasons for establishing and vigorously enforcing antitrust legislation. However, at the same time, it can be very difficult for governments to establish, and particularly to enforce, such legislation because of the great political power of monopolies, a power which is attained in large part by the vast amount of funds that monopolists usually have available to use to influence politicians because of their typically large profits. This power is also the result of the influence that monopolists have over other companies, which they can persuade to lobby politicians on their behalf. Such companies include, subsidiaries, customers and suppliers as well as companies that are connected through interlocking directorships2 (i.e., an executive from the monopoly sits on the board of directors of some other company, often a company in an unrelated but strategically important field).

The term antitrust originated from the fact that such policy was first used in the U.S. with regard to a particular form of monopoly called trusts. A trust was an arrangement by which stockholders in several companies transferred their shares to a single set of trustees. In exchange, the stockholders received a certificate entitling them to a specified share of the consolidated earnings of the jointly managed companies. The trusts came to dominate a large number of major industries in the latter part of the nineteenth century, among the largest and most notorious of which were coal, meatpacking, oil, railroads, steel, sugar and tobacco.

The first federal legislation in the U.S. with regard to trusts was the Sherman Antitrust Act of 1890. However, it was not until 1904 that it was applied successfully, due to the vigorous opposition from the powerful trusts, which controlled many politicians. This success came about when the Supreme Court upheld the federal government's suit to dissolve the Northern Securities Company (a railroad holding company) in the case State of Minnesota v. Northern Securities Company.

The application of the Sherman Act with possibly the most far reaching consequences occurred in 1911, when the Supreme Court found Standard Oil Company of New Jersey in violation because of its excessive restrictions on trade, particularly its practices of eliminating competitors by buying them out directly and by driving them out of business by temporarily slashing prices in a given region.

Despite its age, the Sherman Antitrust Act is still a key piece of legislation in the arsenal of tools to control monopolies in the U.S. It has been supplemented and strengthened with subsequent legislation, including the Clayton Antitrust Act, which was enacted in 1914, the establishment of the Federal Trade Commission (FTC) in the same year, the Robinson-Patman Act in 1936 and the Hart-Scoss-Rodino Antitrust Improvement Act in 1976.

Enforcement of antitrust laws has been uneven, and it has largely reflected political considerations (e.g., which party is in power) rather than the true merits of such enforcement. For example, after the successes in breaking up the trusts in the early part of the twentieth century, enforcement declined in the 1920s. However, under President Franklin Delano Roosevelt new legislation supplementary to the Sherman Antitrust Act was passed and enforcement was vigorously resumed.

1For a closer look at how monopolies can impede technological progress, see Why and How Monopolies Impede Technological Advance, The Linux Information Project, March 2006.

2One of the best-known examples of an interlocking directorship is the serving of Melinda Gates, the wife of Microsoft chairman Bill Gates, on the board of directors of The Washington Post. This was an excellent strategic move on the part of Microsoft, as The Washington Post is the leading newspaper in Washington D.C. and thus has substantial influence with the politicians and bureaucrats who make and enforce antitrust and other legislation relevant to monopolies.

Created April 19, 2006.
Copyright © 2006 The Linux Information Project. All Rights Reserved.