In 1890 the Sherman Anti-Trust Act was enacted. This legislation stated that "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared illegal”.
History books refer to President Theodore Roosevelt as a Trust buster. In 1903 he got Congress to authorize the creation of a new Department of Commerce and Labor that had power over the interstate commerce actions of business and power to monitor labor relations. Over forty suits were brought during Roosevelt's administration against the trusts.
In the early 1890s, the American Sugar Refining Company purchased stock in four other refineries, formerly competitors. By 1892, American Sugar Refining controlled 98 percent of the nation's refineries. In 1902 the Roosevelt administration brought suit alleging that an illegal restraint of trade in interstate commerce had occurred under the terms of the Sherman Antitrust Act. In 1895, the Supreme Court ruled eight to one against the government, reasoning that manufacturing (sugar refining) was not interstate commerce and, therefore, not subject to Congressional regulation.
Standard Oil was organized in 1863 by among others John D. Rockefeller. Over time the Trust came to control a lion's share of the production, transport, refining, and marketing of petroleum products in the United States. The Trust was accused of unfair monopolistic business practices such as temporarily undercutting the prices of competitors until they either went out of business or sold out to Standard Oil and buying up the components needed to make oil barrels in order to prevent competitors from getting their oil to customers.
In 1892 the Ohio Supreme Court declared the Standard Oil Trust to be an illegal monopoly and ordered its dissolution. The order had little effect as Standard Oil was subsequently reorganized in 1899 as a holding company under the name of Standard Oil Company of New Jersey, a state which had laws that allowed corporations to own stock in other corporations. The trust was dissolved into 6 or 7 independent sister companies following a U.S. Supreme Court decision in 1911.
In 1914 during Woodrow Wilson's term, the Clayton Anti-Trust Act was passed to prohibit discrimination in prices among purchasers, exclusive deals tying a purchaser to a single supplier, and any action that "substantially lessens competition or tends to create a monopoly." In the same year, the Federal Trade Commission was created to "prevent the unlawful suppression of competition." Over the years the Commission has been strengthened. In 1936 the Robinson Patman Act gave the commission the power to control prices of interstate commerce. The Act sometimes called the Anti-Chain-Store-Act forbade any person or firm engaged in interstate commerce to discriminate in price to different purchasers of the same commodity when the effect would be to lessen competition or to create a monopoly. In 1950 the Celler-Kefauver Act was enacted to prevent corporate merges that stifle competition and promote monopolies.
The Hart-Scott-Rodino Antitrust Improvement Act of 1976 is in effect an amendment to existing anti-trust legislation. It requires that a company seeking to acquire or merge with another company must file advance notice if its intentions with the Federal Trade Commission and with the Antitrust Division of the Department of Justice at least thirty days prior to the consummation of such a transaction. If the government requests additional information to determine whether the proposed transaction comports with antitrust law, it may extend the waiting period for an additional thirty days after the information is submitted. The waiting period may also be terminated prior to the end of thirty days if the parties request an early termination at the time of filing and if the government elects in its discretion to do so.
There are three tests to determine if a proposed acquisition/merger must provide this notification.
The Commerce Test - if any party to the proposed transaction is engaged in commerce or any activity affecting commerce.
The Size-of-the-Person test - One party's control group must have total assets of annual net sales in access of $200 million and another party's control group must have total seats or annual net sales in excess of $10 million.
The Size-of-the-Transaction test - if either $50 million or more of assets or voting securities are being acquired or 15% or more of voting securities are being acquired.
The numbers cited above reflect changes made to the original act in 2000.
As a result of a suit filed in 1974 under the Sherman Antitrust Act, the American Telephone and Telegraph (AT&T) monopoly was broken up into the so-called “Baby Bells” in 1982.
In 1998 the US Department of Justice and 20 state attorneys general brought suit against Microsoft alleging that MS abused monopoly power when it packaged and bundled together with its Windows operating system and its Internet Explorer web browser. Its competitors product, Netscape Communicator, had to be bough and downloaded over the Internet or be bought in a retail store. In addition there were charges that MS altered its APIs in a way to favor IF over other browsers. The DOJ also charged that MS had violated an earlier consent decree signed in 1994 according to which Microsoft consented not to tie other Microsoft product to the sale of Windows but remained free to integrate additional features into the operating system. MS argued that IE was a feature. In 1999 the judge ruled that Microsoft had committed monopolization and his remedy was that Microsoft must be broken into two separate units, one to produce the operating system, and one to produce other software components. Microsoft appealed the decision and won a partial victory. On September 6, 2001 the new Bush administration announced that it was no longer seeking to break up Microsoft and would instead seek a lesser antitrust penalty.
The subsequent settlement with the DOJ required Microsoft to share its APIs with third-party companies and appoint a panel of three people who will have full access to Microsoft's systems, records, and source code for five years to ensure compliance, but did not require Microsoft to change any of its code nor prevent Microsoft from tying other software with Windows in the future.
Since the settlement with the DOJ several companies have sued Miscrosoft including AOL who had acquired Netscape, Sun Microsystems reagrading the Java language, RealNetworks in digital music and video, Gateway and IBM related to IBM OS/2 operating system and SmartSuite products. Miscrosoft has settletd to the tune of over $3.5 billion. In addition the European Commission has fined Microsoft a record $613 million after it found the company abused its "virtual monopoly" with its Windows operating system and broke European antitrust law governing competition.
Is the mere exsitence of a monopoly or industry doiminence by itself a violation of anti-trust laws?
Clearly, not. The Federal government itself provides patnet protection which can at least for a period of time grant a monopoly. Further in its Standard Oil decision, the Supreme Court established an important legal standard termed the rule of reason. It stated that large size and monopoly in themselves are not necessarily bad and that they do not violate the Sherman Antitrust Act. Rather, it is the use of certain tactics to attain or preserve such position that is illegal. It is sort of like the conduct portion of a child's report card: Plays well with other.
We are all familiar with the Law of Diminishing Returns which states that the ROI on a particular investment say advertising dollars typically grows with the amount of that investment but then plateaus and possibly even drops off. The well known example is adding sugar as a sweetener to a cup of coffee. There is another less well-known law called the Law of Increasing Returns which can be restated more familiarly as “the rich get richer”. A firm with a dominant market position in an industry has the advantages of name recognition, size of customer install base, economies of scale and so forth. At one time in the IT world the saying was “No one ever got fired for buying IBM” . What was the risk/reward ratio for an IT manager who made a decision against IBM for presumed better technology or lower price? As any marketer will tell you it requires far less investment (sales resources, advertising, ) to sell a product and/or service to an existing customer than to locate, attract, interest and sell a new customer. In most industries sales to existing customers often represent the lion's share of revenue. Customers have a significant investment not only in product but also in training, customization, knowledge base and so forth. Multi-year contracts, particularly with technology upgrade clauses, can have a lock-in effect. There is also a network effect with dominant products. If I want to communicate, share data or whatever with other individuals or firms, I have a significant incentive to use compatible products. What could be more compatible than using the very same product? The likelihood that the others have a product from the dominant supplier is high.