Kovacic and Shapiro: Antitrust Policy- A century of Economic and Legal Thinking
*Notes: Horizontal agreement: agreement between competing businesses in same
economic sphere; leads to price-fixing and limiting competition
Vertical agreement: agreement between firms at different levels of the supply chain
- Among American statutes that regulate commerce, the Sherman Act is
unequaled in its generality. The Act outlawed every contract, combination or
conspiracy in restraint of trade and monopolization and treated violations as
crimes. By these open-ended commands, Congress gave federal judges
extraordinary power to draw lines between acceptable cooperation and illegal
collusion, between vigorous competition and unlawful monopolization.
- Although the Sherman Act’s first two decades featured no whirlwind of antitrust
enforcement, the courts began shaping the law’s vague terms. The Act’s
categorical ban on every contract in restraint of trade required judges to develop
principles for distinguishing between collaboration that suppressed rivalry and
cooperation that promoted growth.
- The court distinguished between “naked” trade restraints, where direct rivals
simply agreed to restrict output and raise price, and reasonable “ancillary”
restraints, which encumbered the participants only as much as needed to expand
output or to introduce a product that no single participant could offer.
- Judges also rejected arguments that price-fixing by competitors was benign
because the cartelists set “reasonable” prices or desired only to halt an endless
downward price spiral.
- The Supreme Court held that resale price maintenance agreements, by which a
manufacturer compels retailers to sell its products above a specified piece, is
illegal per se.
- The Sherman Act’s language and legislative history indicated that Congress
didn’t condemn the status of monopoly, but rather had to define the sort of
behaviour which, when coupled with monopoly power, constituted illegal
- Not until 1904, when it blacked the combination of the Northern Pacific and Great
Northern railroads, did the Supreme Court show that the Sherman Act could
forestall mergers and monopolies.
- In Standard Oil Co vs United States (1991), the Supreme Court directly tackled
the question of dominant firm conduct and left 4 enduring marks:
1. The Court treated Standard’s 90 percent share of refinery output as proof of
2. The Court established the “rule of reason” as the basic method of antitrust
analysis. By this standard, judges would assess conduct on a case by case basis, although especially harmful behaviour still might be condemned by per
3. The Court began classifying some behaviour as unreasonably exclusionary. It
ruled that Standard Oil’s selective, below-cost price cuts and buyouts of rivals
illegally created and maintained the firm’s dominance.
4. The Court broke the firm into 34 parts.
- Standard Oil became known as one of the government’s finest hours, but
Congress didn’t see it that way in 1911. Congress feared that the Supreme
Court’s apparent softening of the law, by reading the Sherman Act’s ban on
“every” trade restraint to bar only “unreasonable” restraints, foreshadowed
continuing efforts by conservative judges to narrow the state unduly. This
concern inspired the 1914 enactment of the Clayton Act and Federal Trade
- The Clayton Act reduced judicial discretion by specifically prohibiting certain tying
arrangements, exclusive dealing agreements, interlocking dir