The purpose of antitrust law is to prevent, punish, and deter certain anticompetitive conduct and unfair business practices. Original notions of antitrust law come from the shifting of the U.S. economy and its transition from predominantly family agriculture and small merchants to the Industrial Revolution era, in which the historically famous robber barons of the late 19th century accumulated and wielded such market power that other companies could not compete on a level playing field. These business entities were known as trusts (the most famous being Rockefeller's Standard Oil Trust) and ultimately resulted in a few companies being able to manipulate prices, thereby causing limited choices and high prices for consumers. President Theodore Roosevelt, the renowned trustbuster, led a movement that resulted, eventually, in the federal regulation of trusts that were engaged in anticompetitive behavior. Antitrust laws are exclusively federal statutes, and the agencies charged with enforcement of these laws are the Department of Justice (U.S. Attorney's Office) and the Federal Trade Commission. Violators of antitrust laws are subject to both civil penalties and criminal sanctions, including incarceration.

Modern-day antitrust enforcement is concerned primarily with protecting the competitive process rather than individual competitor companies. The underlying theory is that protection of this process will ultimately benefit consumers. The statutory scheme of federal antitrust law is actually a combination of five different laws. The Sherman Act1 (1890) is the centerpiece of antitrust law and prohibits contracts, combinations, and conspiracies in restraint of trade, as well as monopolization. The Clayton Act,2 enacted in 1914 and significantly amended in 1936 by the Robinson-Patman Act and in 1950 by the Celler-Kefauver Antimerger Act, deals with specific types of restraints, including exclusive dealing arrangements, tie-in sales, price discrimination, mergers and acquisitions, and interlocking directorates. These restraints are covered in detail later in this chapter.

Both the U.S. Department of Justice and the Federal Trade Commission (FTC) enforce various antitrust laws. The Federal Trade Commission Act (FTCA)3 of 1914, administered solely by the FTC, is a catchall enactment that has been construed as including all the prohibitions of the other antitrust laws.

In addition to providing for government enforcement of antitrust statutes, the laws also permit an aggrieved party to file a private enforcement action against an alleged antitrust violator. Some antitrust statutes allow a party that suffers damages by virtue of any antitrust violation the right to a private suit in the federal courts for triple the damages sustained plus reasonable attorney fees and a court order restraining future violations. These statutes are intended to provide a significant financial deterrent to antitrust infraction and to compensate parties injured through anticompetitive behavior. Thought of as the central piece of federal antitrust law, the Sherman Act is divided into two parts. First, the act provides prohibitions against restraints of trade. The Sherman Act prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce."4 The second part of the act covers monopolization. The Sherman Act provides a remedy against "[e]very person who shall monopolize, or attempt to monopolize ... any part of the trade or commerce among the several States."5 This prohibition does not make a monopoly illegal automatically. Only a monopoly that has been acquired or maintained through prohibited conduct is illegal. The Sherman Act has both civil and criminal penalties.

To understand the distinction between the sections, consider the difference between single-firm conduct (only one business engaged in a certain transaction or behavior) and multifilm conduct (more than one business engaged in a certain transaction or behavior). Compared to single-firm conduct, multifilm conduct tends to be seen as more likely to have an anticompetitive effect and is regulated under Section 1 of the act. Single-firm conduct is less likely to be considered as restraining trade; however, under certain circumstances (for example, using market domination to eliminate a competitor), it may be seen as having an anticompetitive effect. Single-firm conduct is covered by Section 2 of the act.

Per Se Standard versus Rule of Reason Standard While the sweeping language of the Sherman Act, taken literally, could reasonably be read as a blanket ban on virtually every commercial agreement, the U.S. Supreme Court has long held that the statute applies only to those parties who have acted in some unreasonable manner that resulted in an identifiable anticompetitive behavior. The Court has developed two standards for use by federal courts in deciding whether or not a certain transaction or action violates the Sherman Act: the per se standard and the rule of reason standard. Some concerted activities are so blatantly anticompetitive that they are considered per se violations. Collusion among competitors to set artificially high pricesa practice known as price-fixingis a clear example of a per se violation. The per se standard has been developed into a comparatively complicated body of law and tests for federal courts to apply. However, the case law still gives business owners and managers relatively clear guidance on what constitutes blatant violations of the Sherman Act that have no competitive justification. In effect, the per se rule means that if a company has committed a per se violation of the act, as articulated in the body of case law, the violator has no defense. The per se standard also promotes more consistent enforcement by regulatory authorities.

For example, suppose that SportCo operates a chain of sporting goods stores in the southeastern United States. SportCo's president contacts the owner of Main Street Athletic Gear, and the two agree not to undercut each other on the price of baseballs. They set the price at 30 percent higher than fair market value. These two have colluded against consumers by fixing an artificially high price for a product. Because the SportCo-Main Street agreement is blatantly anticompetitive, it is a per se violation of the Sherman Act.

Rule of Reason Despite the substantial body of case law that makes up the various rules used in applying the per se standard, the economic complexities of the global business community, technology, and individual industry practices are too unique to be assessed using a strict per se standard. Recognizing the need to assess a certain transaction's impact on the broader marketplace, the Court developed a second standard known as the rule of reason. Even if a transaction is not considered a per se violation, the action or transaction in question must also meet the alternate standard. The rule of reason requires that a fact finder (judge or jury) embark on an examination into market complexities and industry practices in order to determine whether or not the parties' actions violate the Sherman Act. Under this standard, a business alleged to have committed a violation may offer evidence that its actions were reasonable because they were justified and necessitated by economic conditions. In essence, the rule of reason contemplates a scale in which the court weighs any anticompetitive harm suffered against the market wide benefits of the actions. Through this examination, a court may determine whether such justification is merely a pretext for advancement of the violator's economic benefit or whether, in fact, the economic benefits outweigh the burdens.

For instance, in our Sport Co-Main Street example discussed earlier, suppose that instead of agreeing to set a price, the president of Sport Co offered to lead efforts to form Retail Business Association (RBA) with Main Street and other area retailers for the purpose of sharing ideas, information, and data. Depending on the form and content of the information sharing, the RBA may be a violation of antitrust laws. However, RBA would argue that the rule of reason (not per se) should apply, and the association would have to offer legitimate business reasons and economic justifications for its formation. If a court finds that any anticompetitive harm caused by RBA is outweighed by the market wide benefits of its actions, it will conclude that RBA's formation does not violate the Sherman Act.

Two-Sided Markets Increased use of technology in the purchasing and selling of goods has created more concern by regulators over the anticompetitive effect of two-sided markets. Economists generally agree that a two-sided market is at work when an organization creates value primarily by enabling direct interactions between two (or more) distinct types of affiliated customers.6 For example, suppose that Mega Platform is a significant page 632player in the online retail marketplace. Mega Platform creates value by enabling buyers and sellers to find each other quickly. Sellers benefit from access to more buyers for their goods, and buyers benefit from access to more sellers. Figure 19.1 provides an illustration of the basics of a two-sided market.

FACT SUMMARY The U.S. credit card industry is dominated by four major financial services institutions: Visa, Mastercard, American Express Co. (Amex), and Discover. The business model that these institutions use for their credit cards has been dubbed by economists as a "two-sided market." First, the financial institutions provide benefits to consumers that use credit cards by providing them with instant access to a line of credit for purchases. Second, merchants that accept the credit cards benefit because they are paid instantly for consumer purchases. The financial institutions generate revenue on each credit card transaction by deducting a transaction fee from the merchant's funds. The transaction fee is set by each individual financial institution.

In order to increase its share of the consumer credit market, Discover developed a low-transaction-fee model that provided incentives for merchants to steer consumers towards using Discover over other credit cards. In response to the low-transaction-fee model, the other financial institutions began to include "anti-steering" provisions in their agreements with merchants. These provisions prohibited merchants from, among other things, informing their customers of the different fees or offering discounts/ incentives to use other credit cards.

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The Department of Justice (DOJ) and several states (including Ohio) brought a civil lawsuit against Amex, Visa, and Mastercard. While Visa and Mastercard settled the antitrust claims and agreed to remove the anti-steering language from their agreements, Amex defended its practice, arguing that there was no evidence that the anti-steering provisions would harm consumers or the overall credit card market. The trial court ruled in favor of DOJ; however, the appellate court reversed and ruled in favor of Amex. Although DOJ decided not to pursue the case any further, Ohio and other states appealed to the U.S. Supreme Court.

SYNOPSIS OF DECISION AND OPINION The U.S. Supreme Court affirmed the court of appeals' decision in favor of Amex. The Court rejected the government's argument that an increase in merchant fees on one side of the market demonstrated any anticompetitive effect. They pointed out that the government's antitrust theory wrongly focused on only one side of the two-sided credit-card platform. They ruled that evidence of a price increase on one side of a two-sided transaction platform cannot by itself demonstrate an anticompetitive exercise of market power.

WORDS OF THE COURT: Two-Sided Transactions "[T]he credit-card market must be defined to include both merchants and cardholders. Focusing on merchant fees alone misses the mark because the product that credit-card companies sell is transactions, not services to merchants, and the competitive effects of a restraint on transactions cannot be judged by looking at merchants alone. Evidence of a price increase on one side of a two-sided transaction platform cannot by itself demonstrate an anticompetitive exercise of market power. To demonstrate anticompetitive effects on the two-sided credit-card market as a whole, the [government] must prove that Amex's antisteering provisions increased the cost of credit-card transactions above a competitive level, reduced the number of credit-card transactions, or otherwise stifled competition in the credit-card market."

Case Questions

Why are credit card transactions considered a "two-sided market"?

According to the Court, what evidence would be needed to establish that anti-steering provisions violated antitrust laws?

Focus on Critical Thinking: What other types of business transactions could be considered two-sided? Are purchases from online retailers or ride-sharing companies two-sided? What is the impact of this decision on new economy companies that use technology platforms that may be considered two-sided?

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