Antitrust

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)

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

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

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

Cartels typically don’t last long

Cartels tried to prevent cheating

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