Laws to Promote Fair and Competitive Practices
One objective of legislators is to pass laws that the judiciary will enforce to ensure a competitive atmosphere among businesses and promote fair business practices. Chapter 2 explained how competition is a cornerstone of the free- market system. In the United States, the Justice Department’s antitrust division and other government agencies serve as watchdogs to ensure that competition among sellers flows freely and that new competitors have open access to the market. The scope of the government is broad and extensive. The Justice Department’s antitrust division has tackled the competitive practices of market giants such as Microsoft, Visa, and MasterCard.29 Figure A. 3 highlights key high-profile antitrust cases.
There was, however, a time when big businesses were able to drive smaller competitors out of business with little resistance. The following discussion shows how government responded to these troubling situations in the past and how business must deal with new challenges facing them today.
The History of Antitrust Legislation
In the late 19th century, big oil companies, railroads, steel companies, and other industrial firms dominated the U.S. economy. The fear was that such large and powerful companies would be able to crush any competitors and then charge high prices. It was in that atmosphere that Congress passed the Sherman Antitrust Act in 1890. The Sherman Act was designed to prevent large organizations from stifling the competition of smaller or newer firms. The Sherman Act forbids the following: (1) contracts, combinations, or conspiracies in restraint of trade, and (2) actual monopolies >-P. 46-< or attempts to monopolize any part of trade or commerce.
Because of the act’s vague language, there was some doubt about just what practices it prohibited. The following laws were passed later to clarify some of the legal concepts in the Sherman Act:
- The Clayton Act of 1914. The Clayton Act prohibits exclusive dealing, tying contracts, interlocking directorates, and buying large amounts of stock in competing corporations. Exclusive dealing is selling goods with the condition that the buyer will not buy goods from a competitor (when the effect lessens competition). A tying contract requires a buyer to purchase unwanted items in order to purchase desired items. For example, let’s say I wanted to purchase 20 cases of Pepsi Cola per week to sell in my restaurant. Pepsi, however, says it will sell me the 20 cases only if I also agree to buy 10 cases each of its Mountain Dew and Diet Pepsi products. My purchase of Pepsi Cola would be tied to the purchase of the other two products. An interlocking directorate occurs when a board of directors includes members of the board of competing corporations.
- The Federal Trade Commission Act of 1914. The Federal Trade Commission Act prohibits unfair methods of competition in commerce. This legislation set up the five-member Federal Trade Commission (FTC) to enforce compliance with this act. The FTC deals with wide- ranging competitive issues—everything from preventing companies from making misleading “Made in the USA” claims and regulating telemarketers’ practices, to insisting that funeral providers give consumers accurate, itemized price information about funeral goods and services.30 The involvement and activity of the FTC typically depends on the members serving on the board at the time. For example, the FTC conducted three times as many investigations and brought twice as many cases of unfair competition in the 1990s as it did during the 1980s. In the early 2000s, the FTC’s antitrust authority was expanded by the Bush administration. The FTC is now responsible for overseeing mergers and acquisitions in the health care, energy, computer hardware, automotive, and biotechnology industries.31 We will discuss mergers and acquisitions in depth in Chapter 5. The Wheeler-Lea Amendment of 1938 gave the FTC additional jurisdiction over false or misleading advertising. It also gave the FTC power to increase fines if its requirements are not met within 60 days.
- The Robinson-Patman Act of 1936. The Robinson-Patman Act prohibits price discrimination. An interesting aspect of the Robinson- Patman Act is that it applies to both sellers and buyers who “knowingly” induce or receive an unlawful discrimination in price. It also stipulates that certain types of price cutting are criminal offenses punishable by fine and imprisonment. Specifically, the legislation outlaws price differences that “substantially” weaken competition unless these differences can be justified by lower selling costs associated with larger purchases. It also prohibits advertising and promotional allowances unless they are offered to all retailers, large and small. This act applies to business-to-business transactions and does not apply to consumers in business transactions.
The changing nature of business from manufacturing to knowledge technology has called for new levels of regulation on the part of federal agencies. For example, Microsoft’s competitive practices have been the focus of intense investigation. One of the major accusations against the computer software giant was that it hindered competition by refusing to sell the Windows operating system to computer manufacturers who did not agree to sell Windows-based computers exclusively.32 Computer manufacturers had a choice of buying only Windows or buying no Windows at all.33 Given that many consumers wanted Windows, the computer companies had little choice but to agree. Read the description of the Clayton Act again. Do you think Microsoft violated the law? The trial court in the case said it did; however, most of the conclusions of the trial court were overturned at the appeals court level.34 Some say the case is not over yet; three states continue to appeal the decision, so stay tuned to legal developments.35