Federal Efforts to Control Monopoly

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Monopolies were among the first business entities the U.S. government attempted to regulate in the public interest. Consolidation of smaller companies into bigger ones enabled some very large corporations to escape market discipline by "fixing" prices or undercutting competitors. Reformers argued that these practices ultimately saddled consumers with higher prices or restricted choices. The Sherman Antitrust Act, passed in 1890, declared that no person or business could monopolize trade or could combine or conspire with someone else to restrict trade. In the early 1900s, the government used the act to break up John D. Rockefeller's Standard Oil Company and several other large firms that it said had abused their economic power.

In 1914, Congress passed two more laws designed to bolster the Sherman Antitrust Act: the Clayton Antitrust Act and the Federal Trade Commission Act. The Clayton Antitrust Act defined more clearly what constituted illegal restraint of trade. The act outlawed price discrimination that gave certain buyers an advantage over others; forbade agreements in which manufacturers sell only to dealers who agree not to sell a rival manufacturer's products; and prohibited some types of mergers and other acts that could decrease competition. The Federal Trade Commission Act established a government commission aimed at preventing unfair and anti-competitive business practices.

Critics believed that even these new anti-monopoly tools were not fully effective. In 1912, the United States Steel Corporation, which controlled more than half of all the steel production in the United States, was accused of being a monopoly. Legal action against the corporation dragged on until 1920 when, in a landmark decision, the Supreme Court ruled that U.S. Steel was not a monopoly because it did not engage in "unreasonable" restraint of trade. The court drew a careful distinction between bigness and monopoly and suggested that corporate bigness is not necessarily bad.​​

Expert's Note:  Generally speaking, the federal government in the United States has a number of options at its disposal in order to regulate monopolies. (Remember, regulation of monopolies is economically justified since monopoly is a form of market failure that creates inefficiency- i.e. deadweight loss- for society.) In some cases, monopolies are regulated by breaking up the companies and, by doing so, restoring competition. In other cases, monopolies are identified as "natural monopolies"- i.e. companies where one big firm can produce at lower cost than a number of smaller firms- in which case they are subjected to price restrictions rather than being broken up. Legislation of either type is far more difficult than it sounds for a number of reasons, including the fact that whether a market is considered a monopoly depends crucially on how broadly or narrowly a market is defined.​

This article is adapted from the book "Outline of the U.S. Economy" by Conte and Karr and has been adapted with permission from the U.S. Department of State.

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Moffatt, Mike. "Federal Efforts to Control Monopoly." ThoughtCo, Feb. 16, 2021, thoughtco.com/federal-efforts-to-control-monopoly-1147512. Moffatt, Mike. (2021, February 16). Federal Efforts to Control Monopoly. Retrieved from https://www.thoughtco.com/federal-efforts-to-control-monopoly-1147512 Moffatt, Mike. "Federal Efforts to Control Monopoly." ThoughtCo. https://www.thoughtco.com/federal-efforts-to-control-monopoly-1147512 (accessed June 1, 2023).