In the previous segment, we discussed government regulation, and looked at Certificate of Need legislation as an example of a direct entry regulation. In this segment, we will discuss antitrust regulation which is designed to set the ground rules for the pursuit of profits in the economy. The US antitrust law is a collection of federal and state government laws that regulates the conduct and organization of business corporations generally, to promote fair competition for the benefit of consumers. That is, the US government uses antitrust laws to limit the market power exercised by firms, and to control how firms compete with each other. Antitrust laws control how firms attain and maintain market power. These laws make it difficult to gain market power by colluding with competitors or by pushing competitors out of the market. Instead, it makes competitors focus on providing high quality services that consumers value at a price that consumers are willing to pay. Antitrust laws were created at the end of the 19th century in response to the growing concentration of power of corporations that controlled oil, sugar, steel, railroad, and other industries. With machines expediting labor during the Industrial Revolution, as well as cartel behavior and other forms of collusion, firms got larger. Businesses like Rockefeller's Standard Oil, or Carnegie Steel Company became so large that they shut out any competition and harmed consumers. Out of this came trusts, or arrangements in which stockholders in several companies transfer their stocks to a single set of trustees. With these powers, trusts could easily become monopolies. These trusts control entire sections of the economy, dictated prices, made it impossible for other companies to enter the market, and even influence legislators and regulators. There was a need to regulate these monopolies. The Sherman Act of 1890 was the first law that established rule of competitive behavior in the marketplace with the goal of protecting consumers. The Sherman Act has two sections. Section one of the Sherman Act forbids explicit cartels and price fixing. That is, it makes certain agreements among competitors illegal. Here are a couple of examples. One of the most serious anti-competitive agreements is what we call a cartel. And that is a situation where a number of competing businesses get together and basically decide, "Let's not compete with one another". The most obvious example of a cartel is a price fixing conspiracy. Price fixing is the practice of setting prices for products or services rather than letting the forces of demand and supply in the market establish those prices. Another example is group boycott which happens when a group of competitors collectively decide not to deal with a third-party in order to eliminate competition. A third example is market allocation, which describes a situation where competitors agree not to compete with each other in specific markets. This means dividing up territories or services, and creating local monopoly in each of these areas. These activities are illegal per se. That is, these types of agreements constitute a violation of the statue and are illegal regardless of their effects. If two competitors met to fix prices, they broke the law. Section two of the Sherman Act which places restrictions on collusion and monopolization deals with the actions of a single firm that may harm consumers. Although one might read Section two as prohibiting monopolies, courts have interpreted the section differently. Section two prohibits certain actions that could allow a firm to acquire or maintain monopoly power. Put differently, what is illegal is the verb, "To monopolize", but not the noun, "Monopoly". That is fine. While the Sherman Act is important in protecting fair competition, it wasn't bulletproof. For example, one way to bypass the provisions of Section one which forbids cartels and price fixing is for competitors to simply merge with one another. That is, competitors can control prices and production by uniting into a single company instead of forming a trust. While mergers and acquisitions have seen an explosion starting in the mid-1980s, when we adjust these trends to the size of the U.S. economy, the merger wave of the early 1900s was the largest in US history. To correct for these unintended consequences and other loopholes in the Sherman Act, the Clayton Act was passed in 1914 to further protect consumers. Common sections of the Clayton Act that appear in healthcare court cases include price discrimination that lessens competition, the use of tying sales or exclusive dealings that result in reduction in competition, and mergers that reduce competition. Unlike the per se violations under the Sherman Act, most activities under the Clayton Act are subject to examination under the rule of reason. That is, a rule of reason requires an investigation of the effect of the challenged conduct. For example, having two companies contemplating a merger is not illegal. Antitrust authorities may deem the proposed merger anti-competitive, but they will have to convince the courts that such a merger would indeed harm consumers. Congress decided that a special agency was needed to watch for unfair business practices. In 1914, the Federal Trade Commission Act was passed. The Federal Trade Commission or FTC was given the power to investigate and stop unfair methods of competition. More than a hundred years later, the FTC still enforces antitrust laws, as does the Antitrust Division of the Department of Justice which preceded it. The role, structure, and approach are almost identical across the FTC and DOJ. So, why do we need two agencies? This is, for the most part, an historic artifact. But the two agencies do have certain exclusive authority. Having two separate agencies can also play to the advantage of the regulator. For example, most hospital merger cases are handled by the FTC, while most insurer merger cases are handled by the DOJ. To evaluate a hospital merger, the FTC relies on data from insurers. And to evaluate a merger of two insurers, the DOJ relies on data from hospitals. This siloed structure allows agencies to build important relationships that enhance their ability to uncover potential misconduct in a very effective manner. Today, all three of these laws, the Sherman Act, the Clayton Act, and the Federal Trade Commission Act, form the foundation of American antitrust laws. The antitrust laws are simple to state, but have proven difficult to apply.
