Back to Basics

1.1 Antitrust law protects our market-based economy so that consumers get the best deal possible.

The United States has a market-based economy. That means competition between private businesses–not the government–largely determines the prices we pay.

Sometimes, however, a business or handful of businesses finds a way to distort the market and drive up prices.

Imagine if the only two gas stations in your town entered into a secret agreement to set gas prices at $20 per gallon. With no nearby gas stations to compete with them, you’d be stuck paying far more than you would had they not entered into that illegal agreement.

To address this type of anticompetitive behavior, we have antitrust. At its core, American antitrust is a series of laws that seek to protect competition in the market so that consumers get the benefits they are owed and are not taken advantage of by wrongdoers.

1.2 Consumers benefit from more than just low prices.

Antitrust law often focuses on prices, but it’s not limited to that. In fact, competition also affects things like quality and innovation. If your product is better than your competitors’, you are likely to attract more customers. Seeing that, your competitors will then try to catch up and make their products even better than yours.

This continuous cycle of improvement encourages innovation. To get a leg up, businesses will often try to improve their existing product while also inventing ones with new features or creating entirely new products. That’s good for us because it means we have more choices at lower prices. It’s also good for our economy because it promotes growth and productivity.

1.3 Antitrust law doesn’t protect businesses from competition.

Because we have a market economy, the United States lets businesses succeed or fail on their own merit.

For that reason, our antitrust laws don’t protect a business from competition. In fact, our antitrust laws seek to encourage it. In other words, if Carvel comes to town and puts Friendly’s out of business, we may weep at the loss of Friend-Zs, but we wouldn’t use the government to block Carvel from the market or to punish Carvel for competing.

If we did, we’d be using the government to help one business at another’s expense. And because that would hurt competition, it would also ultimately hurt consumers: Friendly’s would have little incentive to cut prices, improve its ice cream, or innovate with new flavors.

It would also lead many businesses to wonder why the government steps in in some cases but not others. If the government can protect Friendly’s from competition, why not save Blockbuster?

Instead, American antitrust exists to promote competition, interfering only when a business engages in behavior that would harm the competitive process. In other words, antitrust law exists to protect competition itself, not any particular competitor.

Recap

• The United States has a market-based economy that allows competition between businesses to determine the price we pay for goods and services.
• This competition encourages rival businesses to improve quality, lower prices, and innovate so that they attract more customers.
• When a business finds a way to rig or corrupt the market so that it can succeed without having to compete on price, quality, or innovation, antitrust law steps in to fix the problem, punish the wrongdoer, and restore the competitive process so that consumers once again benefit.

2.1 Setting the Scene

The United States was the first country to adopt nationwide antitrust laws. Because the United States was first, Congress had to write the country’s most important antitrust law—the Sherman Act—without the benefit of learning from another country’s experience or cribbing language from its laws.

Like other “firsts,” the Sherman Act’s text is broad and vague. Rather than fill in the details itself, Congress delegated the challenge to the courts. And just as it was a struggle for Congress to write the law, it was a struggle for the courts to interpret and apply the law.

As experience with the law grew, the Supreme Court found its footing. Since at least 1979, the Court has used the “consumer welfare standard” to judge when a defendant crosses the Sherman Act’s lines.

2.2 The Sherman Act Broadly Prohibits Unreasonable Restraints of Trade and Monopolies that Hurt Consumers.

Congress passed the country’s first antitrust law—the Sherman Act—in 1890. Designed to rein in trusts like Standard Oil, U.S. Steel, and Northern Securities Company (the railroads), the Sherman Act prohibits (1) businesses from restraining trade and (2) monopolizing, trying to monopolize, and conspiring or combining to monopolize markets.

Congress wrote the Sherman Act broadly and never defined key terms like “restraint of trade” or even “monopoly.” Instead, Congress left it to the courts to flesh out the Sherman Act’s terms and to create rules and standards for applying the law. By leaving it to the Courts, Congress ensured the Sherman Act would evolve as market realities evolved. In other words, rather than spell out specifics in law—and require Congress to pass new laws to amend it—Congress kept things brief so that the courts have flexibility.

2.3 The Supreme Court Struggled to Interpret and Apply Federal Antitrust Laws for Decades.

For nearly 80 years, the Supreme Court struggled to interpret and apply the Sherman Act because Justices disagreed about what the law prohibited and allowed.

Take an early 5-4 decision:a fractured Court held that § 1 of the Sherman Act prohibited all restraints of trade, even reasonable contracts between businesses. But the dissent strongly disagreed, arguing that the law prohibited only unreasonable restraints (a view the Court would officially adopt a decade later).

The justices also disagreed about the law’s purpose. Some justices found that the Sherman Act protected “small dealers and worthy men” from efficient competitors even if that meant consumers paid higher prices. Others argued it protected the public only from practices “tending to bring about the evils [of monopoly], such as enhancement of prices.”

Without a clear sense of the law’s purpose—does it protect competitors, consumers, or both?—or of the rules and standards meant to advance that purpose, the Court issued a dizzying array of contradictory opinions. By 1969, however, practitioners, scholars, and even federal enforcement agencies agreed that the Court’s scattershot approach to antitrust was a failure that provided neither clarity nor predictability.

To sum up, in Judge Douglas Ginsburg’s words: “Forty years ago, the U.S. Supreme Court simply did not know what it was doing in antitrust cases.”

Change was needed.

2.4 The Consumer Welfare Standard Guides Antitrust Enforcement Decisions by Focusing on American Consumers. 

Antitrust scholars seized the opportunity to help the Supreme Court develop better antitrust doctrines. Lawyers at Harvard Law School, for example, emphasized the role of judges: They’re not equipped to substitute their judgment for that of the market’s, so an objective antitrust standard is necessary to keep judges from harming the economy. Scholars at the University of Chicago Law School and its most famous lawyer, Judge Robert Bork, argued that the Sherman Act is meant to protect the benefits competitive markets deliver to consumers—lower prices, higher-quality goods, and innovation.

These two principles transformed American antitrust.

First, both schools of thought agreed that judges cannot enforce the law well unless they understand the law’s purpose and have the right tools to sort unlawful from lawful business conduct.

Second, the Chicago School and Judge Bork gave judges the legal framework to do just that. According to Bork, Congress always meant for the Sherman Act to protect consumers, not other groups like “worthy men.” So with that in mind, judges must ask how a challenged business practice impacts consumers. If it helps, it’s likely legal. If it hurts, it’s likely illegal.

The Supreme Court unanimously adopted this approach—the “consumer welfare standard”—in 1979 and it continues to guide antitrust enforcement today.

Recap

• Congress passed the first antitrust law—the Sherman Act—in 1890 and left most of the law’s details for the courts to flesh out.
• The Supreme Court struggled for decades to figure out the law’s purpose and to create rules or standards that objectively determine when defendants violate the law.
• A broad, bipartisan group of scholars argued that the law protects only consumers, and prohibits only business actions that hurt consumers, creating the modern consumer welfare standard unanimously adopted by the Supreme Court in 1979.