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The Sherman Antitrust Law Helps Sustain Competition in the Market

A monopoly occurs when one company has solid control over the market with a particular product or service. The Sherman Antitrust Law was enacted in 1890 to prevent corporate monopolies or attempts at monopolization. This includes contracts to restrain free trade and protects consumers from unfair business practices. When this act was made into law, Congressional support for it was so strong that there was only one vote against it.

The History of the Sherman Act

In the late 19th century, industry was booming, however there was little government oversight and there was a hostile view towards large corporations who were quickly forming monopolies on their products. The Sherman Antitrust Law was originally proposed by Senator John Sherman of Ohio in order to form a federal regulation that would help deal with multistate corporations. The provisions of the act were to make it illegal to enter into any contract that restrained trade or to form a single company that monopolized a particular market.

Agreements to Restrict Trade

There are two types of trade restraints that are covered under the Sherman Antitrust Laws. These are known as horizontal agreements and vertical agreements. A horizontal agreement is an agreement between two companies that compete with each other. The most common form of this is price fixing. A vertical trade agreement is an agreement between the buyer and the seller. For example if a company agrees to be the exclusive supplier to a manufacturer. Most vertical agreements are legal with the exception of companies that vertical price fix or use resale price maintenance.

Monopolization

The Sherman Antitrust Laws also cover monopolization. If a firm owns at least 70 percent of the market share they may be deemed a monopoly. However, a monopoly in itself is not an illegal practice unless the company engages in exclusionary practices. This means that they are doing something that is “unreasonably anticompetitive.” This includes predatory pricing. Predatory pricing is when a company lowers their prices to a level that competition is forced out of business and then they raise their prices above the market level.

Violating Antitrust Laws

Companies that violate the Sherman Antitrust Law may find themselves facing stiff penalties. Felony charges may also be imposed. The Department of Justice can begin a criminal prosecution against anyone who violates the law under the Sherman Act. The penalties may also include a fine of up to $350,000 for individuals and up to $10 million for corporations for each offense. In some circumstances these fines may be even higher. Offenders may also receive up to three years in prison for each offense.

The Sherman Act works on the theory that a capitalistic market works best when there are several companies competing with each other. It drives innovation and maximizes the quality of goods and services. When it was enacted it was a popular notion that was not controversial, however, economists today disagree on the protections it provides. Now there is question on if this is the best solution to regulate business practices.