What are antitrust laws? Understanding the legislation designed to protect consumers and maintain competition

• Antitrust laws are legislation designed to help protect consumers and foster marketplace competition and have been around since 1890.
• Antitrust laws are designed to address harmful business practices such as price fixing, bid rigging, monopolies, and other unlawful activities.
• The FTC and DOJ enforce antitrust laws, and companies that are in violation of these laws can face hefty penalties.

Antitrust laws are a type of legislation that serve to protect consumers and foster competition in the marketplace. The economy benefits from a diverse range of businesses and offerings, helping foster competitive and open markets.

The result of antitrust laws is a robust and competitive marketplace that protects consumers' interests. Companies found in violation of these laws can face hefty penalties. The federal government as well as individual states enforce their own antitrust laws to ensure there is enough healthy competition.

What do antitrust laws do?

Antitrust laws ensure that the marketplace remains "free and open" and works to protect consumers from corrupt business practices. These laws are upheld by enforcement agencies and are in place to create guidelines and sanctions for businesses, while safeguarding consumers.

According to the US Department of Justice, "American consumers have the right to expect the benefits of free and open competition - the best goods and services at the lowest prices. Public and private organizations often rely on a competitive bidding process to achieve that end."

This philosophy is the backbone of the US economy and antitrust laws help manage the marketplace in favor of consumers and against potential monopolies that can jeopardize competition.

"It's not about leveling playing fields […] but how can we keep the free market operating in a positive way for the US economy and consumers," notes Ann O'Brien, the leader of the Cartel and Government Antitrust Investigations Task Force at BakerHostetler.

Antitrust laws work to protect consumers from:

• Price fixing, which occurs when two or more competitors agree to set prices, or have specific price increases or limits.
• Bid rigging, where multiple firms work together to 'rig' the winning bid in one's favor, such as for government contracts.
• Market division or allocation schemes, where market competitors divide particular markets amongst themselves and may only sell to certain customers.
• Monopolies, where a particular company controls the majority of market share due to unlawful and anticompetitive practices.

"Antitrust laws create a set of guardrails to protect consumers and suppliers from cartel-like behavior, and they protect both competitors and consumers from harm to competition due to exclusionary or predatory conduct," notes William J. Kolasky, partner at Hughes Hubbard & Reed and chair of the Antitrust practice.

Quick tip: You can review antitrust case filings alphabetically using the Department of Justice website.

Antitrust laws and business

Antitrust laws work to prevent mergers and acquisitions that have the potential to lower competition and affect consumer pricing, thanks to The Clayton Act. If companies are over a particular threshold (more on that later) and are pursuing a merger or acquisition, they must file premerger notification and be under governmental review for approval, as part of the ​​Hart-Scott-Rodino (HSR) Act (an amendment to the Clayton Act), notes the FTC.

On top of focusing on mergers and acquisitions, antitrust laws also affect businesses on another level.

"The way in which the antitrust laws help businesses is that more often than not, the direct victims of anticompetitive conduct are not consumers but are purchasers that are themselves businesses," explains Kolasky. "So for example, if a manufacturer or a group of manufacturers were to collude to fix prices, the direct customers who would be harmed would be the retailers and distributors who purchased those products for resale to consumers."

Quick tip: Thinking about a merger or want to learn more? Check out the FTC's "Horizontal Merger Guidelines."

What are the 3 antitrust laws?

Antitrust laws have been around since the first one was enacted in 1890, with two others enacted in 1914. Around the time of the enactment, there were anti-monopoly feelings sweeping across the country against companies like Standard Oil.

"The US Antitrust laws were first adopted back in 1890 during the Gilded Age and they were a response to the growth of large companies that had dominant market shares in their industries as well as a high degree of cartel activity - and by cartel activity I mean price fixing, customer allocation agreements among horizontal competitors," explains Kolasky.

The three federal antitrust laws include:

1. The Sherman Antitrust Act

The Sherman Antitrust Act was put in place in 1890 and "​​prohibits any agreement among competitors to fix prices, rig bids, or engage in other anticompetitive activity," according to The Department of Justice website.

This act also bans monopolies that are formed by unlawful practices such as suppressing the competition, rather than merit.

2. The Clayton Act

The Clayton Act, which was passed in 1914, bans mergers and acquisitions that may pose a threat to competition.

Additionally, the act bans other business practices that may be detrimental to market competition. If a company of a specific size and value wants to pursue a merger or acquisition, the company must notify the Antitrust Division and the Federal Trade Commission first. These thresholds are updated each year, with 2021 thresholds listed here.

3. The Federal Trade Commission Act

The final antitrust law - the Federal Trade Commission Act - bans "unfair methods of competition" according to The Department of Justice website. This act also launched the Federal Trade Commission (FTC) to monitor potential violations of this Act.

These three antitrust laws serve to protect consumers as well as competition and can be enforced by the Federal Trade Commission (FTC) or Department of Justice (DOJ).

Examples of antitrust laws in action

Throughout history, antitrust laws have worked to protect consumers and support competition in the marketplace. The penalties for such violations can be harsh, with corporations fined up to $100 million dollars and individuals up to one million dollars and 10 years in prison.

That fine can jump substantially and could be twice the amount gained by the illegal activities or twice the amount of money lost by victims in the case, if those amounts exceed $100 million dollars, according to the FTC.

Throughout the years, there have been various antitrust cases resulting in massive fines for companies far exceeding $100 million with products ranging from vitamins to automobile parts and more. You can view the list of companies, products, and fines on the Department of Justice website. Recently, tech giant Google has been under fire for violating antitrust laws.

"The US v Google case focuses on Section 2 of the Sherman Act that prohibits monopolization or anticompetitive practices […] in the complaint of that case, the DOJ alleges Google is the 'gatekeeper' of the internet and how they have a monopoly on search," notes O'Brien.

She emphasizes that just because a company is large and takes up a good chunk of the marketplace doesn't automatically mean they're in violation of antitrust laws.

"It's okay to be 'big' […] big is not necessarily bad […] it's how you wield and use that power," says O'Brien. "They used anticompetitive practices against other companies to harm them so that people like advertisers or others did not have the same opportunities in a competitive marketplace."

The financial takeaway

Antitrust laws have been around for over a century and to this day play an important role in upholding a competitive marketplace for consumers. As part of the day-to-day, investors should be mindful of companies and how potential antitrust violations could affect stock share prices.

"If there is reporting by the companies or public media reporting of the existence of an investigation in an industry, that can have an impact on stock prices," O'Brien says. "It's just part of what investors do when they are assessing the long term strengths and risks of a company."

Additionally, you want to be aware of potential mergers and acquisitions and how they can affect stock prices. Kolasky notes that a merger announcement may boost prices but if the merger is challenged by the DOJ or FTC, stock prices may drop.

Understanding how these laws work and what they do can help you become a more informed consumer and investor.