What are Antitrust Laws
Impacts and Effects of Competition Legislations
Antitrust or competition laws pertain to laws that forbid anti-competitive or unfair business practices. Competition is one of the things considered in costing the products of the companies. With plenty of competitors in the market, prices are naturally lower. Competing firms are forced to find ways to differentiate their products such as introducing new technologies or conducting researches.
Uncertainties dominates the business scene because of competition. The natural instinct of companies then is to quash competition in order to maximize profits by acquiring competitor companies or through adopting practices that exclude them. Antitrust laws came about to disallow such negative competitive behavior.
Alabama became the first U.S. state to enact an antitrust law on February 23, 1883. The United States federal government passed the Sherman Antitrust Act in 1890. Several large conglomerates such as the Northern Securities Company, the Standard Oil company, and the American Tobacco Company were found to be illegal trusts, and broken up by the courts.
Antitrust laws govern even the basic day-to-day business decisions such as prices, terms and conditions of sale, contacts with suppliers and customers, advertising and numerous other business activities. Antitrust laws are complex. Unintentional violations to the antitrust laws can happen resulting in penalties. Therefore, businesses must take steps to know the range of the antitrust laws to prevent committing some violations.
Effects of Antitrust Laws
Antitrust laws affect business and decision making by managers. Business activities are often influenced by its competitors and customers. So as not to raise suspicions of violating antitrust laws it is important for a business to keep in mind the following with regards to dealing with its competitors (Abbott Laboratories, 2005):
- Forming agreements or understanding that could wrongly restrict competition such as price fixing, market allocation, group boycott, and bid rigging.
- Discussing competitive information such as pricing policies, distribution policies, supplier pricing or selection, customer selection or classification, credit policies, advertising policies and other critical information is strictly prohibited.
- Meeting with competitors to agree or discuss competitive information is not allowed.
With regards to a business dealing with customers, antitrust laws, generally, prohibit the following:
- Selection of customers – an effective example of this would be a company who does not cater to customers that also deal with competitors.
- Non-Price Restrictions – restrictions that do not involve price e.g., a customer can resell the company's products only to approved or designated persons. Of course, the ‘rule of reason’ applies to this restriction. So it is up to the company to determine if the restriction is within required limits approved by law.
- Resale Price Maintenance – it is unlawful for the company’s customer to set the resale price of the product. But this rule again is subject to ‘rule of reason’. This practice may be legal but up to a certain degree or within reasonable bounds.
- Price discrimination – seller must treat all buyers without discrimination in price.
Exceptions to this rule are:
- Meeting competition rule – that is a seller is allowed to lower the price set to a particular customer to counter competitor’s low price.
- Cost justification – proper documentation is necessary for proof
5. Services, Facilities and Promotional Allowances – all of these must be available all purchasers.
6. Exclusive Dealing Arrangements – commits the buyer to buy most or all of its products from a particular seller.
7. Tying arrangements – this practice conditions the sale of a product to purchase a different product or service from the same company (Keeley, et al. 2005).
Impacts of Antitrust Laws
It is important for a company to consider the above prohibitions before going into business with a customer or in dealing with its competitors. Management decisions must take the antitrust laws into account in order to prevent sanctions or other grave penalties should violations occur.
On the part of the customers, the introduction of antitrust legislation enables the consumers to enjoy lower prices, better product diversity, giving them more choices. Since the influence of large cartels is decreased, they need to compete effectively by catering to the customers’ needs.
Businesses, on the other hand, especially those that are just starting are assured that large businesses could not put them out of business. In the long run, this would provide ample opportunities for the business to grow.
Antitrust does not only favor the customers. In a way, it helps the competing companies too because it enables them to use resources available to them in the most efficient way. They make profits by offering the products consumers are looking for at the price consumers are willing to pay for the amount they need to buy.
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