Does the Sherman Act âreally protect competition, not competitorsâ? A review of the case law reveals a more nuanced picture, in which the courts do not indiscriminately protect competition, but rather restrict certain forms of competition that they consider unfair. The FTC should codify and strengthen these implicit standards.
Is the competition still good? According to many antitrust law enforcement officials, judges, and academics, the answer is yes. When debating the purpose of the Sherman Act and its anti-monopoly provision (section 2) in particular, they say Congress enacted the law “to protect competition, not competitors.” They describe desirable business conduct that the law should bless as âpro-competitiveâ and undesirable conduct that the law should restrict as âanti-competitiveâ. Even some in the camp of progressive reform treat competition as an unadulterated good and argue that âprotecting the competitive processâ is the right goal of antitrust law.
However, a close examination of the case law reveals a more nuanced picture, in which the courts do not indiscriminately protect competition. In interpreting section 2, the Supreme Court and federal courts of appeal have for more than a century restricted certain forms of competition as unfair. Rather than protecting all methods of business rivalry, as I explain in an upcoming law review essay, courts find certain forms of competition illegal. What normative principles inform legal restrictions on particular competitive practices? Judicial interpretations of antitrust law limit the ability of companies to obtain or maintain a monopoly by using their dominant market position, beneficial access to finance, or practices generally prohibited by other laws. These underlying standards of injustice, however, are rarely openly recognized in antitrust complaints and decisions. Without an honest recognition of this morality, we can only argue What practices that the Sherman Act should proscribe, and not Why they should be outlawed by law. The Federal Trade Commission (FTC) can provide philosophical clarity and a practical path forward. To make the current antitrust morality of the market explicit and strengthen their legal force, the FTC should codify the implicit standards of the Sherman Act on unfair competition.
Interpreting Section 2 of the Sherman Act, the Supreme Court ruled that monopoly power alone is not enough to violate the law. In a landmark 1966 decision entitled United States v Grinnell Corp., the Court held that â[t]The monopoly offense under Â§ 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the deliberate acquisition or maintenance of that power as opposed to growth or development due to a superior product, business acumen or historical accident. The Court made it clear that the monopoly itself, as well as some forms of acquiring or preserving a monopoly, were legal under section 2. For example, a company that produces and markets solar panels of roof more efficient and captures the entire market as a result is not guilty of monopolization.
When is a company responsible for monopolization? By articulating the meaning of “the voluntary acquisition or maintenance” of the monopoly (in the language of Grinnel decision), the courts have identified a range of practices. Four deserve to be highlighted. First, a vertically integrated firm that has a monopoly in Market 1, under certain circumstances, cannot refuse to deal with a dependent firm that is not integrated in Market 2 as a means of acquiring or maintaining a monopoly in Market 2. Second , a monopolist cannot coerce or induce business partners, such as distributors and suppliers, not to deal with monopoly competitors and thus restrict their market access. Third, a monopolist – or aspiring monopolist – cannot deliberately incur losses in order to eliminate competitors in order to acquire or maintain a monopoly. Fourth, a business cannot acquire or maintain a monopoly using generally prohibited practices, such as deception and destruction of property.
By limiting or prohibiting these four practices, the courts have failed to explain why they are inappropriate or unfair. Judges qualify these practices as âanti-competitiveâ or âprejudicial to competitionâ, but have generally not offered any normative justification to restrict them. A lawyer or law student who wants to know Why Sherman’s law regulates exclusivity, and prices below cost will find that antitrust case law sheds little light.
A critical reading of the case law reveals an implicit moral conception of unfair competition. First, by restricting refusals to sell and exclusivity, the courts limit the ability of firms to use their dominant position to gain a competitive advantage in order to maintain a monopoly or obtain a new monopoly. In other words, monopolies are not free to coerce dependent rivals or trading partners as a method of competition. A 1948 Supreme Court ruling recognized this anti-coercion standard, declaring that “the use of monopoly power, even legally acquired, to prevent competition, to gain a competitive advantage, or to destroy a competitor, is illegal.” .
Second, by keeping prices below cost, the courts prevent companies from using their financial advantages to obtain or maintain monopolies. For example, a venture capitalized firm cannot suffer losses in a price war against its competitors, if that strategy carries a âdangerous probability of real monopolizationâ. Likewise, a national company with monopoly power in many local markets cannot suffer losses in other markets with the aim of eliminating its competitors and acquiring or restoring its dominance. In contrast, companies are free to lower their prices because of a âweaker cost structureâ resulting from more efficient operations.
Third, the courts have incorporated public order into the doctrine of monopolization. Businesses are not free to use practices prohibited by other federal statutes or the common law, such as deception and sabotage, to obtain or perpetuate a monopoly.
Instead of promoting competition without discrimination, antitrust laws restrict certain forms of competition. Parties harmed by these proscribed competitive methods are entitled to treble damages and a broad injunction under the Clayton Act. Customers can recover monopoly overcosts and suppliers can recover monopsonic underpayments. Besides buyers and sellers, competitors harmed by practices such as exclusivity and predatory pricing may gain lost profits from infringing monopolies. Contrary to the clichÃ© that the Sherman Act âprotects competition, not competitors,â the law restricts certain forms of competition and protects rivals harmed by them. Indeed, if applied literally, bromide to “protect competition, not competitors” would mean that a monopolist could bomb an upstart rival’s factory to eliminate it as a competitive threat and not incur harm. consequences under antitrust laws.
Going forward, the FTC should codify and strengthen the implicit notions of unfair competition in the Sherman Act. In response to the judicial narrowing of the Sherman Act and the adoption of the rule of reason in Standard Oil Co. v. United States, Congress created the FTC in 1914 and gave it the power to prohibit “unfair methods of competition” – a phrase that clearly recognizes that not all forms of competition are welcome and do not deserve legal protection. More importantly, the Congress that passed the FTC law wanted the new Commission to hit trade restrictions in their “early stages” long before companies gained monopoly positions. Given the statutory text and legislative history of the FTC Act, the Supreme Court ruled that the FTC could function “as a court of fairness” and prohibit “not only practices that violate Sherman’s Act and other laws antitrust, but also [those] which the Commission considers contrary to public order for other reasons.
The current FTC, chaired by Lina Khan, has indicated that it will use its unfair methods of competition authority much more ambitiously than the recent Democratic and Republican commissions have done.
What should the FTC do? Here are three possibilities for FTC regulations or policy statements that would draw on and extend the existing Sherman Act standards regarding unfair competition: First, the FTC should prohibit exclusivity agreements and other exclusionary contracts by dominant companies. (A public interest coalition led by the Open Markets Institute, where I work, asked the FTC for such a rule in July 2020.) Second, the FTC should ban below-cost prices by quasi-dominant companies and prevent well-heeled companies from deploying their financial firepower as a competitive weapon. Third, the FTC should view violations of other laws, such as environmental and labor laws, as a method of unfair competition. For example, a company can gain a critical competitive advantage through an anti-union campaign that violates the National Labor Relations Act (NLRA). It can keep payrolls low and gain a significant cost advantage over top-tier competitors who comply with the NLRA and respect their workers’ right to organize.
All three of these actions would prevent companies from using market dominance, superior financial resources, and generally prohibited practices as a method of competition. The proposed FTC’s policy agenda would not be purely negative and proscriptive. It keeps the promise to orient the business strategy towards more socially beneficial ends. By restricting certain competitive methods as “unfair”, the FTC would channel business strategy in other directions. Instead of trying to use dominance, financial privilege, or general violation of the law as a competitive method, more companies would seek to compete by treating customers, workers, and suppliers fairly, developing new goods, and services, seeking operational efficiency and increasing production capacity. The result could be a political economy with more affordable goods and services, higher wages, more jobs and larger investments. The merits of an aggressive FTC competition policy-making program in general and its idiosyncrasies can and will be debated, but this perspective reveals a fundamental truth: Lawmakers, regulators, and the public must ask, not whether law encourages competition, but what kinds of competition it promotes.
Disclosure: The Open Markets Institute, where the author is employed, led a coalition that called on the FTC to ban exclusivity deals and other exclusionary contracts by dominant companies in July 2020.