Our series–Back to Basics–explains American antitrust law in plain English. Here, you’ll find everything you need to know about the current law and its history, a few “fun” anecdotes, and analysis of proposed reforms.
The last thing America should do is follow in the footsteps of the U.K. or European Union, whose barriers to innovation have prevented the growth of successful technology businesses. Spotify is the only leading global internet firm to have emerged from Europe.
Almost 100 years ago, America tried the European approach, but we soon realized the “ask first, innovate later” approach hampered growth and competition. Instead, America has focused on protecting consumers and encouraging competition.
Today’s antitrust regime is not perfect, but it reflects a century-plus of accumulated wisdom to promote America’s global competitiveness and consumer well-being.
In the United States, our free markets set prices for goods and services. Consumers benefit from how market competition enables lowered prices and improved product quality. Competition also keeps businesses on their toes, encouraging them to innovate and create new products.
Sometimes, a single business or two gains control of the entire market for a product or service and takes anticompetitive steps to benefit at consumers’ expense. They might collude to set prices higher than they’d ordinarily be, or they might tie products together so that consumers have to buy Product B even if they want only Product A.
The most common consumer harms of such anticompetitive conduct are higher prices, reduced output, and stagnant or lower-quality products.
To prevent or remedy these harms, we have antitrust law. Our enforcement agencies focus on restoring competition in the market so that prices, quality, and innovation reflect the market’s actual dynamics, not a monopolist’s corrupted market.
Monopoly describes when an entire industry or market is controlled by a single firm.
Monopoly power is an antitrust term to describe businesses that have “significant and durable market power” or the “long term ability to raise prices or exclude competitors.” It focuses on how much competition a business faces. The more competition, the less likely a business has monopoly power.
Monopoly power is about more than just a business’s size and market control— it’s about what you do with that size and control.
There’s no magic number for “monopoly power.” In economics, a business can be a monopoly only if it’s the sole business operating within a market. But in law, a business can be a monopoly even if it has a few competitors operating within the same market. What matters is the business’s share of the market (how much does it control?), what the business did to gain that control, and what the business is doing with that control.
That’s where things get complicated. To determine how much market control a business has, one must first define the market. In general, the government tries to define the market as narrowly as possible to inflate the business’s control (the smaller the market, the fewer competitors); businesses try to do the opposite.
Courts generally define the market by looking at substitutes: If Ford raises its prices by 5% or so, will consumers switch to other car manufacturers? If yes, those manufacturers are Ford’s competitors and the market includes them and Ford. Ford’s market share is thus relative to theirs: How many total sales in the market belong to Ford?
No. Contrary to popular belief, it is not actually illegal to have monopoly power under US antitrust law.
Antitrust violations are only found when three things have been proven:
- The business has market power within the relevant market.
- The business abused that market power and used anticompetitive practices.
- The business harmed consumers.
This three-prong test ensures that businesses compete vigorously and have the ability to expand while consumers benefit from lower prices, higher quality goods, and greater innovation.
Antitrust is an extraordinary remedy for an extraordinary problem that largely only steps in when a business uses its monopoly power to strengthen its position in a way that ultimately harms consumers.