Legal Definitions - Sherman Antitrust Act

The Sherman Antitrust Act is a landmark federal law passed in 1890 that serves as a cornerstone of U.S. antitrust policy. Its primary purpose is to promote fair competition in the marketplace and prevent businesses from engaging in activities that restrict trade or create monopolies. Essentially, it aims to ensure that markets remain open and competitive, benefiting both consumers and other businesses by fostering innovation, fair prices, and a wide range of choices.

Specifically, the Act prohibits two main types of anti-competitive behavior:

• Agreements that restrain trade: This includes any contract, combination, or conspiracy among businesses that limits competition in interstate or foreign commerce. Such agreements might involve competitors colluding to control prices, divide markets, or boycott other businesses.
• Monopolization: This prohibits businesses from acquiring or maintaining monopoly power through unfair or anti-competitive means, or even attempting to do so. It targets actions by a dominant company that are designed to eliminate competition and control a market.

The Sherman Act was later supplemented by other federal laws, such as the Clayton Act, to further strengthen antitrust enforcement and address additional anti-competitive practices.

Examples of the Sherman Antitrust Act in Action:

• Market Division Between Competitors:

  Imagine two leading manufacturers of athletic footwear, "StrideFast" and "SprintPro," secretly agree that StrideFast will only sell its high-end running shoes in the western United States, while SprintPro will exclusively market its similar products in the eastern United States. They explicitly agree not to compete in each other's designated regions.

  How this illustrates the Sherman Antitrust Act: This secret agreement constitutes a "combination or conspiracy in restraint of trade." By dividing the national market, StrideFast and SprintPro eliminate direct competition in their respective territories, which could lead to higher prices, fewer choices, and reduced innovation for consumers. The Sherman Act makes such collusive agreements illegal because they undermine the principle of free and open competition.

• Predatory Pricing to Eliminate Rivals:

  Consider a dominant online streaming service, "StreamGiant," which begins offering its premium subscription at an extremely low price, far below its operating costs, in a new market where several smaller, local streaming services operate. StreamGiant's explicit strategy is to drive these smaller competitors out of business, after which it plans to significantly raise its subscription fees once it has become the sole major provider in that market.

  How this illustrates the Sherman Antitrust Act: StreamGiant's actions could be seen as an "attempt to monopolize" the streaming market through predatory pricing. By intentionally selling below cost to eliminate competition, StreamGiant is engaging in an anti-competitive practice designed to create a monopoly. The Sherman Act prohibits such strategies because they ultimately harm consumers by reducing their choices and subjecting them to higher prices once competition is eliminated.

• Exclusive Dealing Arrangements That Block New Entrants:

  A major producer of specialized medical diagnostic equipment, "HealthTech Innovations," enters into long-term, exclusive contracts with all the prominent hospital networks across the country. These contracts require the hospitals to purchase diagnostic equipment *only* from HealthTech Innovations and forbid them from buying from any other manufacturer. This makes it nearly impossible for new or smaller medical equipment companies to sell their products to hospitals.

  How this illustrates the Sherman Antitrust Act: These exclusive contracts could be considered "contracts in restraint of trade" because they effectively block competitors from accessing the market. By monopolizing the supply to major hospital networks, HealthTech Innovations prevents other companies from competing fairly, limiting innovation and choice in medical equipment. The Sherman Act aims to prevent such arrangements that stifle competition and create significant barriers for new businesses.