Antitrust and The Sherman Act

      The central idea of a free-market economy is competition. Until the Civil war, most businesses were small and local. Vertical and horizontal integration of industries became common after that. Competition was at risk.

      Congress responded, in 1890, by passing the Sherman Act. In 1911, the Supreme Court construed it according to a rule of reason: Instead of finding certain lines of conduct illegal in all circumstances, the Court decided that the legality of agreements restraining trade should be determined by the reasonableness of their results. In 1914 Congress again attempted to restrain monopolies, by passing the Clayton and the FTC Acts.

      The Sherman Act comprises two sections. Section 2 prohibits monopolization, attempts to monopolize, and combining or conspiring to monopolize any part of interstate or foreign commerce. The courts use a "structural analysis" to determine if firms have monopoly power. The first step of this analysis is defining the market a company has dominated, the second is calculating the percentage of that market which it enjoyed.

      Section I of the Sherman Act prohibits combinations, contracts, and conspiracies in restraint of trade. It differs from Section 2 in that the action prosecuted if the intent was monopolistic. Such an attempt need not be successful to be illegal. The most common antitrust offense under Section I is price fixing, which involves the collusive setting of prices by competitors.

      The courts sometimes examine the consequences of price fixing to determine if they are desirable enough to override its basic illegality. Many professional associations have tried-mostly without success-to justify price fixing by arguing that unrestrained competition is not desirable in the learned professions.

      Price fixing and other horizontal restraints affect a number of enterprises in the same line of trade. Vertical restraints tend to affect businesses upstream or downstream from the companies that insist upon them. Thus, for example, a company might demand that its customers sell its products at specified prices. This practice, called "resale price maintenance, " is purely vertical in nature. In contrast, territorial restrictions on trade can be either horizontal or vertical. They are horizontal-and illegal per se-when different companies in the same line of business agree to grant one another exclusive territories. Vertical territorial restrictions are not always illegal because they may promote competition among different brands. These arrangements are examined by the courts on a case-by case basis.

      Competition has costs as well as benefits. As a result, some industries and activities are exempt from antitrust law.