Home > Encyclopedia of Business and Finance > Sherman Antitrust Act of 1890

The Sherman Antitrust Act of 1890, the first and most significant of the U.S. antitrust laws, outlawed trusts and prohibited "illegal" monopolies. The act applies to both domestic companies and foreign companies doing business in the United States. A trust is a relationship between businesses that collaborate through anticompetitive agreements to gain market dominance. Trusts cut prices to drive competitors out of business. "Illegal" monopolies are those that can be shown to use their power to suppress competition. A monopolist has the power to dominate markets—the ability to set the price by altering supply. Anticompetitive techniques include:

• Buying out competitors
• Forcing customers to sign long-term agreements
• Forcing customers to buy unwanted products in order to receive other goods ("Understanding Antritrust Law," 1999)

Through the passage of the Sherman Antitrust Act, Congress provided safeguards to prevent firms from merging with other firms if the effect

was to substantially lessen competition and create monopolies.

The Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice enforce antitrust laws. The FTC has the power to temporarily stop companies from employing suspected anticompetitive practices, while the Justice Department probes and prose cutes businesses. Blake (1984) wrote that the Supreme Court, as ultimate judicial arbiter of the Sherman Antitrust Act, has interpreted the act as "a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as a rule of trade." It is based on the premise that "the unrestrained interaction of competitive forces will yield the best allocation of our economic resources … while at the same time pro viding an environment conducive to the preservation of our democratic political and social institutions" (p. 253).

The act was passed in response to strong and widespread political pressure to deal with "the trust problem" that reached a peak during the presidential election campaign of 1888. The trusts were corporate holding companies that, by 1888, had consolidated a very large share of U.S. manufacturing and mining industries into nationwide monopolies. Some of the most notorious corporate holding companies were the sugar trust, John D. Rockefeller's oil trust, and J. P. Morgan's steel trust. The original legal form of these organizations had been as business trusts. The Sherman Act made trusts and those who violated the act subject to civil remedies and criminal penalties in actions by the Department of Justice and to treble damages in private suits. The act was broad, providing few standards, which meant the executive branch and federal courts had to resolve the trust issues. The Sherman Antitrust Act of 1890 was revised by the Clayton Antitrust Act of 1914, which was designed to catch early-stage practices that were thought to lead to monopolies, such as corporate mergers and acquisitions, price discrimination, typing agreements, and interlocking directorships. Other antitrust acts followed, including the Federal Trade Commission Act of 1914, the Robinson-Patman Act of 1936, and the Celler-Kefauver Act of 1950.

Consequences of being found guilty of antitrust activity and being a monopoly are a fine not exceeding $10 million if a corporation or $350,000 if person or by imprisonment not exceeding three years, or by both punishments, at the discretion of the court. Furthermore, the court can require breakup of the company and other consequences based on individual cases.

Today in the United States monopolistic power means that a business has the power to raise prices above competitive levels. This typically occurs when an organization has exclusive control over a commercial activity, such as the production or selling of a commodity or service, and thus has the power to fix prices unilaterally because it has no effective competition. Significant antitrust litigation has included the following:

• 1911, American Tobacco—broken up into separate companies
• 1911, Standard Oil—broken up into separate oil-refining and pipeline companies
• 1920, U.S. Steel—no illegal monopoly found
• 1982, IBM—accused of being an illegal monopoly; case dropped
• 1983, AT&T—accused of being an illegal monopoly; broken up into one long-distance and seven "Baby Bell" local phone companies
• 1998, Microsoft—accused of using monopoly power to sell other products; as of February, 2000, penalties had not been set
• 1999, Intel—accused of severing business ties with customers who sue it; penalties varied depending on customers bringing litigation