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Chapter 4 Outline:

4.1 Why Competition is Important for Consumers

4.2 Antitrust and The Federal Trade Commission (FTC)

4.3 Wheeler-Lea Act

Introduction 

In the late 1800s and early 1900s, a “trust” was the organization of multiple businesses in the same industry formed with the intention of controlling the entirety or near entirety of said industry. John D. Rockefeller built Standard Oil and Andrew Carnegie built U.S. Steel into two of the most powerful and ruthless trusts in the United States. The slashing of wages, union busting, undercutting competitors’ prices to force them out of business, and backroom government deals, were some of the tactics used by these businessmen, often characterized by the term “robber barons.” By 1865, Standard Oil had become the biggest and most profitable organization in the world, and by 1882, Standard Oil gained control of over 90% of oil refineries in the United States. As the trusts grew, so did the pushback from the general public, eventually leading Congress to take action with the Sherman Antitrust Act of 1890.

The Sherman Antitrust Act was the first legislation that prohibited the formation of trusts or other monopolies and prohibited other anti-competitive behaviors. Initially, however, few antitrust cases brought by the federal government were successful, as courts generally only applied the law against unions as illegal combinations, rather than limiting the formation or breakup of trusts as Congress intended. Not until 1911, did a court find Standard Oil to be in violation of the Sherman Antitrust Act and ordered the dismantling of Standard Oil’s 33 most important affiliates.

The Clayton Act, introduced in 1914 as an An Act To supplement existing laws against unlawful restraints and monopolies, and for other purposes, it sought to prevent anticompetitive practices before a trust could be built. The Sherman and Clayton Act, among others, continue to serve an important function for the government to prevent exploitation of consumers when it comes to competitive behavior.

4.1 Why Competition is Important for Consumers 

Imagine if your area had only one grocery store, one car dealership with only one brand of car, or one store to purchase one brand of phone. Without competition from other grocers, the grocery store may not have the incentive to lower prices. Without other car dealers, the dealer or store may not have the incentive to offer a variety of models of cars or phones. Competition is about keeping prices low, giving consumers a large selection of choices, and high quality service.

Though consumers cannot do much against large corporations themselves in terms of breaking them up in the name of antitrust law, consumers do need to be aware of how large corporations impact them through limiting competition. Protecting competition is one of the main purposes of antitrust law. Ensuring consumers have choices means that companies must innovate. As the saying goes, competition breeds innovation, and innovation gives consumers better and cheaper products and more products to choose from.

4.2 Antitrust and The Federal Trade Commission (FTC)

As a part of the government’s interest in ensuring companies were acting within the best interest of the public, President Theodore Roosevelt persuaded Congress to create a new department, the Department of Labor and Commerce. Housed within this new department, the Bureau of Corporation served an important purpose as the Roosevelt administration sought to prosecute violations of the Sherman Antitrust Act  through investigating the financial books of corporations that conducted business across state lines.

Following the decisions of the courts to dismantle Standard Oil and American Tobacco, the topic of antitrust became central to the national debate leading up to the election of 1912. After several years of debate in Congress, President Woodrow Wilson signed the Federal Trade Commission Act on September 26, 1914. Absorbing the duties of the Bureau of Corporations, the Federal Trade Commission (FTC) opened its doors in March 1915.

Since then, the Department of Justice, which shares jurisdiction with the FTC has prosecuted violations of antitrust laws and takes a keen interest in examining potential mergers that could stifle competition and ultimately harm consumers. When a company acquires competitors within that industry, that may be considered a horizontal merger. In December 2020, the FTC sued Facebook alleging that the company is illegally maintaining its social networking monopoly through years of anticompetitive conduct. The FTC points to Facebook’s 2012 acquisition of its up and coming rival Instagram, its acquisition of WhatsApp, and the imposition of anticompetitive conditions on software developers.

A vertical merger occurs between companies at different stages of the chain of commerce. In October 2016  telecommunications giant AT&T announced they would acquire entertainment leader, Time Warner Inc for $108 million. The Department of Justice sued in an attempt to block the merger as a violation of the Clayton Act, which prohibits “acquisitions including mergers, ‘where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially lessen competition.” The Court ruled, however, that the vertical merger between AT&T, a content distributor and Time Warner, a content producer, would not violate the Clayton Act.

4.3 Wheeler-Lea Act

In the 1931 Supreme Court case of Federal Trade Commission v. Raladam, the Court held that unless the company’s acts or practices were proved to have injured competitors or potential competitors, the Commission was powerless to prevent them even if those acts caused injuries to the public. Essentially, because the FTC Act was an antitrust statute designed to protect competition, any injuries to the public were not able to be redressed under the law as written. Congress responded by passing the Wheeler-Lea act in 1938 to expand the power of the FTC to restrict unfair or deceptive acts or practices with respect to advertising.

Endnotes

American’s Gilded Age: Robber Barons and Captains of Industry, Maryville University, https://online.maryville.edu/business-degrees/americas-gilded-age/

FTC Sues Facebook for Illegal Monopolization, FTC (2020), https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-facebook-illegal-monopolization

Horizontal Merger, Corporate Finance Institute (N.D.), https://corporatefinanceinstitute.com/resources/knowledge/strategy/horizontal-merger/.

The Wheeler-Lea Act, Address of Hon. R.E. Freeer, Commissioner, Federal Trade Commission, Before the Annual Convention of the Proprietary Association, N.Y., 1938, https://www.ftc.gov/system/files/documents/public_statements/676351/19380517_freer_whe_wheeler-lea_act.pdf.

U.S. Loses Appeal Seeking to Block AT&T-Time Warner Merger, The New York Times (2019), https://www.nytimes.com/2019/02/26/business/media/att-time-warner-appeal.html