Sherman Antitrust Act: Definition, History, and What It Does

What Is the Sherman Antitrust Act?

The Sherman Antitrust Act refers to a landmark U.S. law that banned businesses from colluding or merging to form a monopoly. Passed in 1890, the law prevented these groups from dictating, controlling, and manipulating prices in a particular market.

The act aimed to promote economic fairness and competitiveness while regulating interstate commerce. The Sherman Antitrust Act was the U.S. Congress' first attempt to address the use of trusts as a tool that enables a limited number of individuals to control certain key industries.

Understanding the Sherman Antitrust Act

Sen. John Sherman from Ohio proposed the Sherman Antitrust Act in 1890. It was the first measure the U.S. Congress passed to prohibit trusts, monopolies, and cartels from taking over the general market. It also outlawed contracts, conspiracies, and other business practices that restrained trade and created monopolies within industries.

At the time, public hostility was growing toward large corporations like Standard Oil and the American Railway Union, which were seen as unfairly monopolizing certain industries. Consumers felt they were hit with exorbitantly high prices on essential goods, while competitors found themselves shut out because of deliberate attempts by large corporations to keep other enterprises out of the market.

This signaled an important shift in the American regulatory strategy toward business and markets. After the 19th-century rise of big business, American lawmakers reacted with a drive to regulate business practices more strictly. The Sherman Antitrust Act paved the way for more specific laws like the Clayton Act. Measures like these had widespread popular support, but lawmakers genuinely wanted to keep the American market economy broadly competitive in the face of changing business practices.

Competing individuals or businesses are not permitted to fix prices, divide markets, or attempt to rig bids. It also lays out specific penalties and fines intended for businesses that violate these rules. The act can impose both civil and criminal penalties on companies that don't comply.

Special Considerations

Antitrust laws refer broadly to the group of state and federal laws designed to ensure that businesses are competing fairly. These laws exist to promote competition among sellers, limit monopolies, and give consumers options.

Supporters say these laws are necessary for an open marketplace to exist and thrive. Competition is considered healthy for the economy, giving consumers lower prices, higher-quality products and services, more choice, and greater innovation.

However, opponents argue that allowing businesses to compete as they see fit—instead of regulating competition—would ultimately give consumers the best prices.

Sections of the Sherman Antitrust Act

The Sherman Antitrust Act is divided into three key sections:

• Section 1: This section defines and bans specific means of anti-competitive conduct.
• Section 2: This section addresses end results that are by their nature anti-competitive.
• Section 3: This section extends these guidelines and provisions to the District of Columbia and U.S. territories.
  

Early issues and amendments

The act received immediate public approval. But because the legislation's definition of concepts such as trusts, monopolies, and collusion was not clearly defined, few business entities were actually prosecuted under its measures.

The Sherman Antitrust Act was amended by the Clayton Antitrust Act in 1914, which addressed specific practices that the Sherman Act did not ban. It also closed loopholes that the Sherman Act established, including those that dealt specifically with anti-competitive mergers, monopolies, and price discrimination.

For example, the Clayton Act prohibits appointing the same person to make business decisions for competing companies.

Historical Context of the Sherman Antitrust Act

The Sherman Antitrust Act was born against a backdrop of increasing monopolies and abuses of power by large corporations and railroad conglomerates.

The Interstate Commerce Commission (ICC)

Congress passed the Interstate Commerce Act in 1887 in response to increasing public indignation about abuses of power and malpractices by railroad companies. This spawned the Interstate Commerce Commission (ICC). Its purpose was to regulate interstate transportation entities. The ICC had jurisdiction over U.S. railroads and all common carriers, requiring them to submit annual reports and prohibiting unfair practices such as discriminatory rates.

During the first half of the 20th century, Congress consistently expanded the ICC's power so much that, despite its intended purpose, some believed that the ICC was often guilty of assisting the very companies it was tasked to regulate by favoring mergers that created unfair monopolies.

The Gilded Age

Congress passed the Sherman Antitrust Act at the height of what Mark Twain called the Gilded Age of American history. The Gilded Age, which spanned from the 1870s to about 1900, was dominated by political scandal and robber barons, the growth of railroads, the expansion of oil and electricity, and the development of America's first giant (national and international) corporations.

The Gilded Age was an era of rapid economic growth. Corporations took off during this time, in part because they were easy to register and, unlike today, did not have to pay any incorporation fees.

Trusts in the 19th Century

Late-19th-century legislators' understanding of trusts is different from our current concept of the term. During that time, trusts became an umbrella term for any sort of collusive or conspiratorial behavior that was seen to render competition unfair. The term trust has evolved over the years, though. Today, it refers to a financial relationship in which one party gives another the right to hold property or assets for a third party.

Example of the Sherman Antitrust Act

On Oct. 20, 2020, the U.S. Department of Justice filed an antitrust lawsuit against Google, alleging that the online giant engaged in anti-competitive conduct to preserve monopolies in search and search advertising. Deputy Attorney General Jeffrey Rosen compared the complaint to past uses of the Sherman Act to stop monopolistic practices by corporations.

“As with its historic antitrust actions against AT&T in 1974 and Microsoft in 1998, the Department is again enforcing the Sherman Act to restore the role of competition and open the door to the next wave of innovation—this time in vital digital markets,” Rosen said in a press release.