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Antitrust Laws Are Ineffective

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Submitted By angel29603
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INTRODUCTION
Imagine a world where individuals can provide a good or service to consumers, and in return be compensated. They might do a very good job and even make a considerable profit. Other individuals, seeing the success of this industry, would try to enter the market in order to compete. This idea is the very basis of free market and capitalist economies. But sometimes there are situations where an individual will have a product or service that is better, cheaper, or quicker than everyone else; so much so that they are the only ones that can effectively provide it. When this occurs, competing businesses and giant government entities will stop at nothing to shut it down.
The Sherman Antitrust Act, the Clayton Act, and the Federal Trade Commission Act make up the current US antitrust laws. The antitrust laws are supposed to promote and protect competition. The philosophy behind the laws is that trusts and monopolies will stagnate markets and prevent others from engaging in healthy market competition. A monopoly is defined as a situation in which a single company owns all or nearly all of the market for a given type of product or service. (Investorwords, 2010)
Antitrust law legislation started with the Sherman Act that was passed in 1890. The intent of the law was put in place to challenge the unchecked growth of corporations. By 1888, large corporations gained enough market muscle to dominate entire industries. The Sherman Act outlaws all contracts, combinations, and conspiracies that unreasonably restrain interstate trade. This includes agreements among competitors to fix prices, rig bids and allocate consumers. The Act also makes it a crime to monopolize any part of interstate commerce. Criminal prosecution will be filed if the Sherman act is violated. If found guilty, the violator can be fined up to $1 million and sentenced up to 10 years in federal prison; corporations can be fined from anywhere from $100 million and in some cases even more.
The Clayton Act of 1914 was created to add further substance to the Sherman Act. The purpose of the Clayton Act was to help clarify the language of its parent Sherman Act. The Clayton Act prohibits mergers or acquisitions that are likely to lessen competition. The act outlawed specific practices designed to monopolize a market including price discrimination, exclusive agreements, tying contracts, mergers, and interlocking directorate. The act carries no criminal penalties.
To ensure consistent and predictable implementation of competition policy, the Federal Trade Act was created. The Federal Trade Commission Act of 1914, prohibits unfair methods of competition in interstate commerce, but carries no criminal penalties. It also created the Federal Trade Commission to police violations of the Act. (U.S. Department of Justice, 1996) The federal trade commission is made up of five bipartisan bodies that are appointed by the President of the United States.
Traditionally, the government did not interfere with businesses. Many of the founding fathers rejected any government interference in commerce, viewing such practices as tools for granting special privileges and excluding competition. As explained by economist Peter Dooley(2000), the British embraced “a system of government policy based on commercial favoritism, grants of monopoly privilege, restraints on trade, government subsidies, discriminatory taxes and similar forms of state intervention in the marketplace.” According to historian Norman Risjord(1994).This policy is called Mercantilism; where the nation prosperity is dependent upon its supply of capital; that lasted from the 15th -18th century. Author of the Declaration Of Independence and one of the founding fathers, Thomas Jefferson regarded this system as “an ‘unnatural’ policy that provided government awards to ‘parasites.’”(Risjord, 1994)
These awards spawned enduring monopolies, created and protected by the government. The United States antitrust laws were formed out of fear that consumed the U.S. in the years after the Civil War. Starting with an era known as the “Gilded Age,” the United States underwent a period of great advancements in social, industrial, and economic growth (Cashman,1993), thanks in large part to the booming railroad industry. In 1862, the first transcontinental railroad, connecting the Pacific and Atlantic lines, were being constructed. Railroads quickly became the premiere method of transportation and the rail owners took full advantage of the people who utilized it by an “unfair” tactic known as price discrimination. Small businesses and farmers were charged more for using the railroads because they had a relatively inelastic demand for service than larger businesses.
In 1911, Standard Oil also engaged in “unfair” practices. Led by J.D. Rockefeller, Standard Oil began buying out many smaller oil companies and formed unions with other larger oil companies. Together, these companies formed a “trust,” or “an arrangement by which stockholders in several companies transferred their shares to a single set of trustees. In exchange, the stockholders received a certificate entitling them to a specified share of the consolidated earnings of the jointly managed companies ( Ourdocuments, 2010). This practice allowed the group of companies to engage in predatory pricing and drive out competition in their regions; thus creating monopolies. Farmers and other members of the lower to middle-class looked to the government for help with the unfair practices of the wealthy. Congress, who at the time was not known to interfere with private business, gave into its constituents demands and passed the Interstate Commerce Act of 1887 and the Sherman Antitrust Act of 1890 in order to regulate industries and control the predatory practices. This victory for the “little man” essentially ended the Gilded Age and a new populist political movement of government reform and regulation was created. Called the Progressive Era, it brought forth ideological thought and theory that; among other things, sought “to change other people; to end class conflict; to control big business; and to segregate society” (McGerr, 2000). One of the earliest and most popular leaders of the Progressive Era was President Theodore Roosevelt. Armed with the Sherman Antitrust Act, Roosevelt made a career out of being a “trust-buster,” or one who uses federal law to persecute with the intent to break-up large businesses. While the point of the Sherman Antitrust Act is to prevent persons from engaging in anti-competitive activity, Roosevelt had used the law to file 44 antitrust lawsuits during his eight-year tenure against businesses that he “presume[d] to be equal to the government” (Robards, 1996). However, Roosevelt had no interest in breaking up the trusts; rather he was “focused on bringing big business under stronger regulation (Norton et al.,2009)
Although it appeared that a new era in business regulations was about to begin, the Sherman Antitrust Act was enforced at a slow pace and hit many judicial roadblocks. The act also had left some legal loopholes, allowing large companies to continue constructing monopolies. The Sherman Antitrust act did not ban all restraints upon trade, but only on ones found to be anticompetitive. Following the path of his predecessor, newly elected President Thomas Woodrow Wilson would persuade Congress to pass the Clayton Antitrust act and the Federal Trade Commission Act in 1914.
In theory, antitrust laws are necessary. They provide consumer protection from predatory businesses and maintain fair competition across all industries. However, many of the times these laws do more harm than good to businesses and consumers. Such oversight on “big business,” leads to large government bureaucracies and the striping away of free market ideals. Rather than protect consumer interests, the antitrust laws stand as an obstacle to innovation and to better service and prices for consumers.
The Department of Justice filed 54 cases in 2008 against 59 individuals and 25 companies. At the close of fiscal year 2008, the Division had 137 pending grand jury investigations, the greatest number of pending grand jury investigations since 1992… in just the fourth month of fiscal year 2009, its fine total for fiscal year 2009 already exceeds $745 million.(Antitrust Division,2009). When businesses, like Intel or Microsoft, have to spend billions of dollars on legislative costs to combat competitors and claims and government investigations, the consumers lose. There needs to be a serious change in the approach to anticompetitive legislation if the goal is to maintain competition.

DISCUSSION Many people share the common belief that antitrust laws create more innovation because without competition, a business would have no incentive to create a better product for its consumers. However, antitrust laws do nothing to help with quality of the product. In fact; antitrust laws prevent business from making a product that is “too good.” An example of this would be the long standing battle of the United States vs. Aluminum Co. of America (ALCOA) ALCOA had been accused multiple times of having a monopoly on 'virgin' aluminum ingot. In 1911, ALCOA managed to become a dominant figure in the aluminum industry by creating a better aluminum at a lower price than its competitors. They did this by signing exclusive contracts with mining and power companies; and in turn gave them discounted aluminum materials. This practice, called vertical integration, is a perfectly legal process and is used in many other industries. Unhappy with the amount of success that ALCOA was having, the Justice Department filed an antitrust lawsuit, stating that ALCOA was buying all of the supplies in order to prevent competitors from having access to them (Carlton & Perloff ,2008). ALCOA eventually settled the lawsuit and decided they were better off canceling the exclusive supply contracts. In 1937, ALCOA managed to regain 100% of the market share in aluminum and items used to create it; bauxite and alumina. They also had over 50% on the market of items created from the aluminum; including aluminum rods, sheets, and utensils (Smith, 2006). However, ALCOA had not intentionally drove competitors out the market. The price of aluminum had decreased dramatically and they were the only company to survive the weak market. Again the government filed a lawsuit (United States v. Aluminum Co. of America (ALCOA), 1945), this being the largest antitrust lawsuit in American history. Spanning five years, the government

accused ALCOA of, among other things, price squeezing by selling their ingots at a price so high no firms could compete in producing aluminum-based materials, and engaging in a business strategy with the “intention of eliminating competition” (Carlton & Perloff, 2008). The presiding Judge Leonard Hand, found that ALCOA had been found guilty of monopolization because they “effectively anticipated and forestalled all competition” (Carlton & Perloff, 2008).
This ruling proved that not only is outstanding corporate success frowned upon; it is down-right illegal. For trying to be best aluminum provider and creating the best product in a very low-profit industry, ALCOA faced years of lawsuits and litigation, instead of successfully providing a product consumers enjoy. After the trial, ALCOA attorney Leon Hickman wrote “I can see why Judge Hand felt that no matter how we got where we were, that it wasn’t in the public interest that we be in such a dominant position. If you kept that in mind, then you worked back from that. ‘What do I pin on them?’…the fact that we were the first in every market that we opened up. But, suppose that we had acted as a monopoly is supposed to act, and we simply sat back and took our profits and hadn’t developed the market? You would say now that there is a monopoly of action. There is a great need for new markets and new uses for aluminum and you aren’t meeting it. So, in a way, from his approach, we had no escape. He’d get us either way” (Smith, 2006) Antitrust laws also do more harm than good because it requires businesses to invest heavily in large legal teams to defend against relentless lawsuits. In the microprocessor industry, Advanced Micro Devices, Inc. (AMD) and Intel Corp. have stood as battling rivals since 1968. Early in their rivalry, the two corporations had managed to stay out of the court house due to patent agreements and healthy competition. However, the explosion of personal computing in the early 90’s and the massive increase in demand for their computer chips turned, this healthy rivalry into a vicious and rabid fight. These two corporations have been filing lawsuits against each other for the past two decades; including three antitrust lawsuits and countless government investigations.
In 2005, AMD filed a complaint against Intel stating that they used “scare tactics and coercion” by offering rebates to PC makers to use their chips (Singer & Kawamoto, 2010). As ridiculous a complaint as that sounds, it was the strongest case that AMD ever had against Intel. Earlier in the year, Intel was investigated and found in violation of the very same offense by the Japan Fair Trade Commission. Using the information obtained from that investigation, AMD filed the lawsuit. Intel had to assemble a strong legal team to defend against the suit. They spent an estimated $116 million on legal fees, but there was also another anti-competition investigation against Intel by the European Union (Clark, 2009). They were fined $1.45 billion by the EU and were running out of legal expenditures. Intel was eventually forced to settle with AMD for $1.25 billion (Singer & Kawamoto, 2005).
Based on complaints filed by competitors, Antitrust laws give the government unlimited authority to punish and dominate firms. In 1998, the Department of Justice, 19 states and the District of Columbia launched a landmark antitrust case against Microsoft. After an 18-month trial, costing taxpayers $13.3 million (Grimaldi, 1999), the company was placed under strict oversight by the government. Prior to the case Microsoft dominated the PC software market. In 1985, Microsoft released an operating system called Microsoft Windows. The operating systems become large in the market due to their exclusive deal with IBM. IBM launched the first series of personal computers open to the general public. The company’s leading rivals generated envy and animosity toward their success. Unable to create a competitive product, the rivals formed together The Anti-Microsoft coalition became known as NOISE ( Netscape, Oracle, IBM, Sun and Everybody else. ) . According to Marc Andreessen co-founder of Netscape, the company intended to reduce windows to “a poorly debugged set of device drivers. (Zajac,1998). Instead of coming together to design a superior product than Microsoft, NOISE decided to lobby political officials. Netscape’s CEO Jim Barksdale recognized the power of government to “help hinder the technology industry” and concluded that it made little sense to compete fairly through innovation when “working with the government is more productive”.(Miles,2002) This “working” relationship even included private breakfast at Barksdale’s palo home with the DOJ’s Chief antitrust official, assistant attorney general Joel Klein. (New York v. Microsoft, 1998) These laws empower politicians and judges to manipulate the market under the guise of “competition”. As a result, antitrust laws can foster competition or be wielded for revenge. In reality, the threat of abusive public power and consumer suffering is far larger than the threat of private monopoly. One of Netscape claims was that they believed to be at a competitive disadvantage because Microsoft offered free internet browser with their operating system. Bill Gates stated in a press release “This is one of the greatest ironies of this case – the government is trying to increase the price consumers pay for browsing”. (Microsoft News Center,1998)
Consumers also pay the price because businesses do not know what constitutes as permissible behavior. Normal business practices -- price discounts, product improvements and exclusive contracting -- can somehow morph into an antitrust violation (Levy, 2003) .Pricing has been a particularly popular area for antitrust action. If the prices are set high, then new competitors could be expected to enter the market. If prices are set too low, the firm is likely to be charged with “predatory pricing” – pricing products below costs temporarily in order to drive competition out of the market and then raising the price in a market devoid of competition. In the long run however, predatory pricing cannot work because firms cannot suffer losses for long periods of time. Obviously, predatory pricing pays off only if the surviving predator can then raise prices enough to recover the previous losses, making enough extra profit thereafter to justify the risks. These risks are not small.(Sowell, 1999) . And the fact is that if the prices are subsequently raised then the prospect of profits will attract new entrants, including beaten companies that could reopen. And if several firms charge the same or similar prices they are guilty of price-fixing. Price fixing is an agreement between participants to buy or sell in the market at a fixed price also known as a cartel. Companies cooperating to increase their profits are no different from any joint venture, partnership, or joint stock company. (Younkins, 2002). As a result companies would get together and form mergers. A merger is a process wherein two entities assimilate and assume the role of one acting entity.
In early January 2010, Ticketmaster and Live Nation formed a merger in to be known as Live Nation Entertainment. In 2008,Ticketmaster controlled 83 percent of the ticketing market in the US with its next biggest competitor Stubhub owned only four percent of the market shares. Its biggest customer, Live Nation, suddenly figured out that software for selling tickets was not that complicated, decided to launch its own ticketing subsidiary. They quickly grabbed 16 per cent of the market and Ticketmaster retaliated by buying Front Line Management, which manages tours for 200 of the country's top music artists to cut into Live Nation's market. (Kastelein, 2010) Popular musician, Bruce Springsteen stated: "The one thing that would make the current ticket situation even worse for the fan than it is now would be Ticketmaster and Live Nation coming up with a single system, thereby returning us to a near monopoly situation in music ticketing,"(Albanesius, 2009)
Mergers are monopolies in the making. When one company merges with another the product and consumers of the two separate entities are acquired and merge as well. As a result the controlling faction of the merged company now grows exponentially. When two companies become a single entity by means of choosing to come together or a buyout the newly constructed business now controls a greater share of the market. The new company will have complete control of the market.(Richardson,2010) The end result is a monopoly; the very act that these laws were created to prevent. The reasons that antitrust laws were created, are the same reasons why that they don’t work.
With that said, antitrust lawsuits are used more as a tool to control successful businesses, than as a means to protect competition or consumers. Because of the controlling nature of government, businesses have to be very careful with the amount of output they sell, what price they ask for, and how dominate their product is on the market. Economist and former Chairman of the Federal Reserve, Alan Greenspan voiced his displeasure with these laws. He outlined in his essay, “Antitrust” the paradoxical nature of the laws and why they are harmful to business and consumers.
With this in mind, some people argue that at least the antitrust laws haven't done any harm. They assert that even though the competitive process itself inhibits coercive monopolies, there is no harm in making doubly sure by declaring certain economic actions to be illegal. But the very existence of those indefinable statutes and contradictory case law inhibits businessmen from undertaking what would otherwise be sound productive ventures. No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born. No one can ever compute the price that all of us have paid for that Act which, by inducing less effective use of capital, has kept our standard of living lower than would otherwise have been possible. The United States have led to the condemnation of the productive and efficient members of our society because they are productive and efficient.(Rand, Branden, Greenspan & Hessen, 1998))

References
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Albanesius, C. (2009). Live nation ticketmaster deal: An online monopoly. PC Mag.com Retrieved from http://www.pcmag.com/article2/0,2817,2340849,00.asp
Carlton, D.W. & Perloff, J.M. (2008). Modern industrial organization. Boston, MA: Pearson/Addison.
Cashman, S. D. (1993) America in the gilded age: From the death of Lincoln to the rise of Theodore Roosevelt (3rd ed.). New York, NY: University Press.
Clark, D. (2009). Intel sues an insurer over ligation costs. Wall Street Journal, B7.
Dooley, P.C. (2000). The labour theory of value: Economics or ethics. London: Taylor & Francis LTD.
Grimaldi, J. (1999). Microsoft case costs justice department $13.3 million. Seattle Times.
Investorwords. (2010). Monopoly. Investorwords.com. Retrieved from http://www.investorwords.com/3112/monopoly.html
Kastetelein, R. (2010). Dual threats for the secondary ticket market from the live nation ticketmaster merger from live nation ticketmaster merger. Euticket news. Retrieved from http://www.euticketnews.com/20100130266/dual-threats-for-the-secondary-ticket-market-from- the-live-nation-ticketmaster-merger.html.
Levy, R.A. (2003). Antitrust: The case for repeal. Cato Institute. Retrieved from http://www.cato.org/pub-display.php?pub_id=2949.
McGerr, M. (2003). A fierce discontent. The rise and fall of the progressive movement in America. New York, NY: Simon & Schuster, Inc.
Microsoft News Center. (1998) A case of trial in error: The Microsoft antitrust lawsuit [Press release]. Retrieved from http://www.microsoft.com/presspass/features/1998/12-7 traildoc.nspy.
Miles, S. (2002) How to hack a party line: The democrats and silicon valley. University of California Press 67.
Norton, M.B., Sheriff, C., Katzman, D.M., Blight, D.W., Chudacoff, H., & Logevall, F.(Ed.). (2009). A people and a nation: a history of the united state. Since 1865 (Vol. 2). Boston, MA: Wadsworth,Cengage learning
Ourdocuments.(2010). Sherman antitrust act (1890) [Datafile}. Retrived from http:www.ourdocuments.gov/doc.php?flash=true&doc=51&page=pdf.
Rand, A., Branden, N., Greenspan, A. & Hessen, R. (1986). Capitalism: The unknown ideal. New York, NY: New American Library.
Richardson, R. (2010). Mergers and acquisitions create monopolies. Helium. Retrieved from http://helium.com/items/1365319-mergers-and-acquisitionscreate-monopolies.
Risijord, N.K. (1994). American Profiles: Thomas Jefferson. Madison, WI: Madison House.
Robards, J. (Interviewer) & Cooper, J.M. (Interviewee). (1996). Historian John Milton Cooper on Trust Busting [Interview audio]. Retrieved from American Experience the presidents Web site: http://www.pbs.org/wgbh/amex/presidents/26_t_roosevelt/filmmore/ra_jcootrust.html
Singer, M. & Kawamoto, D. (2010). AMD files antitrust suit against intel. CNET news. Retrieved from http://news.cnet.com/amd-files-antitrust-suit-against-suit-against-intel/2100-1001-3-5765844.html
Smith, G.D. (1006). Alcoa v. U.S. a historical perspective [PowerPoint slides]. Retrieved from http://www.ftc.gov/os/sectiontewohearings/docs/alcoacaseorgdspresentationhp.pdf.
Sowell, T. (1999). Predatory prosecution. Forbes.com. Retrieved from http://www.forbes.com/forbes/1999/0503/6309089a.html
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