What Is Antitrust Law? Understanding Its Significance Through Real Cases

Google’s ads, Amazon’s platform, Amgen’s attempted acquisition of Horizon.

Even just last year, several large corporations were in the spotlight because of antitrust laws,

and this year Nvidia is at the center of controversy over antitrust issues.

So why do antitrust laws seem to come up so often, and why do they seem to give companies such a hard time?

Antitrust law is designed to prevent companies from abusing a dominant position to restrict competition, thereby promoting competition among firms and protecting consumers. Economies grow when there is competition among businesses, and when various unfair trade practices arise from the use of monopoly power—such as market domination, price-fixing, bid-rigging, and market allocation—consumers ultimately bear the cost.

The main statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission (FTC) Act.

The Sherman Act, enacted in 1890, was the first major antitrust law in the United States, created to protect free and fair competition.

In the late 19th century, mergers and acquisitions by large corporations were rampant in the United States. In response, Senator John Sherman introduced this bill in 1890, and it has served as the foundation of U.S. antitrust regulation to this day.

The law prohibits two main categories of conduct.

Standard Oil Company was founded in 1870 by John D. Rockefeller, and it experienced rapid growth from the late 1870s to the early 1880s.

They managed every stage from crude oil production, transportation, refining, storage, to distribution, which maximized efficiency. But they did not stop at growing through competition; they began driving other competitors out of the market.

For example, they would sharply cut prices in regions where competitors were located to force them out of the market, then raise prices again; or they would secretly strike deals with railroad companies to secure lower freight rates than their rivals, while having those rivals charged higher rates…

In this way, they kept buying up oil companies across the United States, and their market share reached 90%. It was 1878.

This suppressed competition in the market and stifled innovation. With no need to compete, technological progress slowed and the overall efficiency of the industry declined.

In 1906, the U.S. government filed a lawsuit against Standard Oil under the Sherman Act. In 1911, the U.S. Supreme Court ruled that Standard Oil had violated the Sherman Act, and Standard Oil Company was broken up into 34 independent companies.

Netscape Navigator is a web browser like the Internet Explorer we all know.

Its first version, Mosaic Netscape 0.9, was released on October 13, 1994, quickly gaining popularity in the market, and the official version 1.0 was launched on December 15, 1994. In a short period, it captured a 75% market share and established itself as the leading browser.

The secret to its popularity lay in a feature that significantly improved the user experience by displaying text and images simultaneously while a page was loading. This was in stark contrast to earlier web browsers, which showed nothing until the entire page had finished loading.

Microsoft must have been envious as Netscape Navigator’s popularity surged. In less than a year, in August 1995, it released Windows 95.

Windows is an operating system and Mosaic Netscape is a web browser—so what do they have to do with each other?

Along with Windows 95, Microsoft released the first version of Internet Explorer. Yes, the Internet Explorer we’re all familiar with. Microsoft bundled Internet Explorer with the Windows operating system, so users could browse the web without having to install a separate browser.

This convenience was a major reason Netscape Navigator struggled to enter and compete in the market.

Netscape Navigator’s market share held steady through 1996 and 1997, but began to gradually decline thereafter.

In 1998, the U.S. Department of Justice and 20 state governments filed an antitrust lawsuit against Microsoft, alleging violations of the Sherman Act.

In 2000, a federal district court ruled that Microsoft had violated the Sherman Act and ordered the company to be broken up, just like Standard Oil Company. Naturally, Microsoft appealed, and on appeal, Judge Jackson’s inappropriate remarks and conduct during the trial became an issue, leading the case to be reassigned to another judge and reconsidered.

In 2001, when the George W. Bush administration took office, the political climate shifted. Compared with the previous administration, it was less aggressive on antitrust enforcement.

This worked in Microsoft’s favor, and in November 2001 the breakup order was ultimately replaced with a settlement that merely restricted certain conduct. If Microsoft had actually been broken up back then… the company at the top of the market-cap rankings today might be very different.

The Sherman Act played an important role in prohibiting monopolistic conduct and cartels, but it lacked concrete regulatory tools. As a result, some companies were able to exploit loopholes in the law and still maintain their monopoly power.

The Standard Oil Company we mentioned earlier is a prime example of a firm that took advantage of those loopholes.

To recap: Standard Oil reached a 90% market share in 1878, the Sherman Act was enacted in 1890, but the U.S. government didn’t go after Standard Oil until 1906.

Why did they sit on their hands for 16 years after passing the law? Microsoft was sued almost as soon as Netscape Navigator’s market share started to fall.

The trust structure—where multiple companies transferred their shares to a trust company, which then managed those shares and effectively ran all of them as if they were a single firm—was Standard Oil’s main trick for dodging the Sherman Act. All of the companies behaved “as if” they were one, but they were not legally a single entity, which made them hard to regulate under the Sherman Act.

Discretionary price adjustments were not the kind of monopoly the Sherman Act was written to target. It was hard to argue that prices were being manipulated for the purpose of monopolization. The secret agreements with railroad companies also fell outside the specific practices the Sherman Act was designed to regulate. They simply weren’t directly covered by the statute.

After a grueling legal battle, Standard Oil finally faced an antitrust judgment, and that case paved the way for legislation that filled in the gaps left by the Sherman Act: the Clayton Act and the Federal Trade Commission Act.

The Clayton Antitrust Act of 1914 was designed to address the shortcomings of the Sherman Act. It explicitly prohibited certain anti-competitive practices. The key provisions included:

You can sense how the law was shaped in response to Standard Oil’s more unsavory tactics.

The Clayton Act was subsequently amended and developed multiple times. The 1936 Robinson-Patman Act, which prohibits discriminatory pricing practices, and the 1976 Hart-Scott-Rodino Antitrust Improvements Act, which requires companies pursuing mergers to notify the federal government before a merger agreement is executed so that antitrust authorities can review whether the merger is likely to lessen competition, are key examples.

In 1982, the U.S. Department of Justice filed a lawsuit against AT&T under Section 7 of the Clayton Act, which prohibits mergers or acquisitions that may substantially lessen competition or tend to create a monopoly. At the time, AT&T held a monopoly over the U.S. telephone communications market, and it ultimately ended up being broken up into seven regional Bell operating companies.

Enacted in the same year, the Federal Trade Commission Act (FTC Act) was introduced alongside the Federal Trade Commission (FTC), an independent federal agency established to monitor and regulate unfair competitive practices.

Section 5 of the FTC Act prohibits "unfair methods of competition" and "unfair or deceptive acts or practices." Because this provision can be interpreted very broadly, and because the FTC was granted administrative enforcement authority, antitrust enforcement became more effective. Whereas the Department of Justice had previously been limited to bringing judicial antitrust lawsuits, the creation of an administrative agency made it possible to streamline procedures and intervene more quickly.

In 2003, the FTC found that VISA and MasterCard had prevented their member banks from issuing American Express or Discover cards.

These rules made it difficult for American Express and Discover to secure new issuing banks or expand partnerships with existing banks, and were deemed to restrict competition and consumer choice. The FTC therefore ordered the companies to stop enforcing these anticompetitive rules.

As a result of this ruling, American Express and Discover were able to issue their cards more freely through member banks, which in turn helped promote competition in the credit card market.

In this way, antitrust law plays an important role in preventing the abuse of dominant market positions and fostering long-term, macro-level market growth.

Firms that suffer from price manipulation disappear, everyone can compete on a level playing field, and we can witness the resulting growth of the market. Understandably, this may sound unwelcome to shareholders of a particular company. From the company’s perspective, having a monopoly and no competitors is an unparalleled piece of good news.

But true strength is forged in competition. A company that does not face competition may enjoy dominance only briefly. A complacent incumbent can stifle market growth, and that inevitably ends up constraining the growth of the very monopolist left standing alone in that market.