• Antitrust refers to laws and regulations designed to mitigate market power of monopolies, with the intent of making markets more competitive
  • Antitrust conduct falls into two categories
    • Per se: price fixing, market division
    • Rule of reason: most everything else
  • In order to understand why current laws are the way they are, we need some background
    • Why society wanted regulation
    • How these regulations were flawed (from an economic efficiency perspective)

Antitrust background: Pre-Civil War

  • Prior to the Civil War, monopolies didn’t cause many problems
    • This doesn’t mean that the market then was perfectly competitive
    • Lack of transportation and absence of accurate market information insulated local businesses from competition
    • Nonetheless industries were relatively unconcentrated and were populated by small firms.
  • During the war, demand for products such as guns, shoes, and machinery skyrocketed
    • Economies of scale in certain industries led to an increase in concentration
    • Surprisingly, firms still generally behaved competitively

Antitrust background: Post-Civil War

  • After the Civil War, many farmers and small businesses became unprofitable (agricultural depression)
    • Farmers were required to pay substantial taxes to keep the railroads running
    • Railroads priced competitively if there were multiple railroads servicing specific routes; however, they increased prices in cities without competition
    • Local grain elevators behaved similarly based on the degree of competition nearby
    • Low prices of farm products
  • Public opinion began to turn against big businesses
    • Many big businesses used predatory pricing (i.e. Standard Oil)
    • Political corruption became apparent
  • Farmers and small businesses started to lobby the government for regulation

Antitrust background: Cartels

  • Profits of big businesses increased even more with the formation of cartels
    • Cartels are agreements between firms to collude
  • Cartels operated in various forms across a wide variety of industries (i.e. oil, railroads, alcohol, metals, coal, lumber, meat)
    • Price-fixing agreements where firms agreed to set prices arbitrarily high
    • Restraint of trade

Antitrust background: Cartel cheating

Cartels typically don’t last long

  • Firms in the cartel could cheat by undercutting the cartel price
  • Results in an unraveling of the cartel

Cartels tried to prevent cheating

  • A pool is a cartel agreement where all members combine and split their profits.
  • Pools did not mitigate all incentives to cheat

Antitrust background: Trusts

While pools worked in some cases, they weren’t super effective

  • Pools were eventually replaced by trusts, a group of firms that allow a third party to make the majority of operating decisions
  • Designed to allow the group of firms to behave like a monopoly without merging

The general public hated trusts

  • Trusts used their market power to charge exceptionally high prices
  • Trusts corrupted public employees and lawmakers, who then enacted protective tariffs to further increase the market power of the trusts
  • Resulted in trusts having substantial power over communities by controlling the factories and plants