U.S. antitrust laws were first passed during the industrial revolution, when a few dominant firms – “trusts” – began to influence the marketplace by buying up competitors and engaging in activities that harmed suppliers and consumers. The 1890 Sherman Act sought to regulate trusts, reflecting a growing concern in Congress regarding the influence of powerful and wealthy corporations.53 Laws dealing explicitly with mergers were a feature of the 1914 Clayton Act, which regulated contracts that would “lessen competition” in the marketplace, with an eye toward protecting smaller firms.54 While the Clayton Act was largely negated by the Supreme Court, merger law again came to the fore in 1950 with the Celler-Kefauver Act. The Hart-Scott-Rodino Premerger Notification Act of 1976 required companies to notify antitrust authorities of impending acquisitions. As an outgrowth of a number of court cases in the 1960s, U.S. merger law could essentially deem illegal any horizontal merger that concentrated substantial market share, unless one of the firms was failing.55
As case law evolved further, U.S. officials increasingly saw antitrust law as protecting smaller, more inefficient firms that charged higher prices and thus harmed consumer interests. Larger firms that could exploit economies of scale were more efficient, economists argued, and mergers that concentrated market share but also led to increased industrial efficiencies could actually benefit consumers.56 During deregulation in the 1980s, government intervention in the marketplace declined substantially, and the adoption of the Justice Department’s Merger Guidelines in 1982 underscored a more laissez-faire approach toward mergers by allowing firms to defend mergers by arguing that the merger would result in increased efficiencies.57
The wording of the Sherman Act prohibits “monopolization,” not the existence of a monopoly position alone. A dominant or monopoly position (usually two-thirds or more of the market) needs to be accompanied by some behavioral component – abuse of that position – in order to trigger an investigation.58 Thus, U.S. antitrust law has come to reflect the dilemma of policymakers of preserving the ability of large U.S. firms to compete in the global marketplace, on one hand, and preventing large firms from distorting the domestic marketplace, on the other.
Antitrust enforcement in the United States falls on the shoulders of two federal agencies – the Antitrust Division of the Department of Justice and the Federal Trade Commission (FTC) – although individual states may intervene against anticompetitive practices within their borders.59 The Antitrust Division and FTC have concurrent jurisdiction, particularly with regard to mergers, and have developed a system to prevent situations in which both agencies investigate the same companies at the same time.
The most notable difference between the two agencies is that the Antitrust Division can levy criminal penalties against a corporation – violations of the Sherman Act can result in a fine of $10 million per offense or double the amount gained through the violation, whichever is greater – while the FTC is an independent regulatory agency charged with preventing behavior that violates the spirit, if not the letter, of the Sherman and Clayton Acts.60 When the Antitrust Division or FTC reviews a merger, it can essentially do one of three things: block the merger, approve the merger, or impose conditions on the merger, such as requiring certain manufacturing units to be spun off or sold.
Further, the court system provides an avenue for individuals or corporations to sue under the Sherman and Clayton Acts for damages due to anticompetitive behavior. U.S. antitrust law is quite litigation-oriented, and court decisions have shaped antitrust law throughout its history. If a firm is found in violation of antitrust laws, it must pay three times the damages plus court costs, which can result in payments or settlements in excess of $1 billion. While the number of antitrust cases brought to court has come down from as many as 1,500 a year in the early 1980s, the number of cases remains substantial – 500 cases were brought in 1992.61
The threshold for concentration of market share that constitutes a monopoly position is somewhat imprecise. In practice, it is sometimes possible for a firm with less than 50 percent market share to charge exceedingly high prices and thereby abuse its position, while a firm with 90 percent market share might be unable to raise its prices even marginally.62 The ability to exploit a dominant position depends on the sensitivity of demand to price changes, also known as the price elasticity of demand. With respect to mergers, U.S. authorities begin to scrutinize combinations of competing firms that result in a combined market share of 20 percent or more, and are particularly wary of mergers in industries with high barriers to entry.63
The Hart-Scott-Rodino Act adopted a formula, known as the Herfindahl-Hirschmann Index (HHI), to measure market share in geographical and sectoral terms, which helps to determine whether a merger warrants an investigation.64 The HHI formula calculates the concentration of a market by summing the squares of the market shares of the firms involved in the merger; the government is more likely to investigate a merger if the total exceeds 1,800 than if the total is less than, say, 1,000. In the case of the Boeing-McDonnell Douglas merger, even a conservative estimate of Boeing’s global market share at 60 percent and McDonnell Douglas’ market share at 10 percent (60 squared = 3,600 plus 10 squared = 100 for a total HHI of 3,700) made it likely U.S. authorities would investigate.
Even when an investigation has found that a merger would result in a dominant market position, mergers have sometimes been approved on the basis of other considerations. Mergers can go ahead if firms can demonstrate increased efficiencies that would lead to long-term consumer benefits. If barriers to entry in an industry are low, mergers are often approved on the assumption that other firms can enter the market to maintain competitive balance. Laws also permit a “failing company” defense by which a company determined to be unable to survive financially on its own may merge with a competitor, although the rules defining a failing company are stringent and uses of this defense in court are rare.65 Finally, the Pentagon may intervene in support of a merger that preserves the ability of the government to procure military supplies, in the interest of national security.66 These factors can provide rationale for antitrust authorities when they approve mergers, and arguments for merging firms in seeking approval or in court proceedings.