The Sherman Antitrust Act is the first in a line of federal laws protecting consumers from unfair prices

The Sherman Antitrust Act is the first of three major antitrust laws designed to stop anticompetitive practices

• The Sherman Act was the first antitrust law, signed by President Harrison in 1890 and was meant to preserve competition in the market and avoid monopolization.
• Antitrust laws preserve market competition and protect consumers from unfairly high prices.
• The Sherman Act was deemed too vague and later amended by the Clayton Act.
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The US economy is based on a free enterprise system where the markets, not the government, determine prices. For this system to function properly, there must be competition.

"The fundamental purpose of our antitrust laws is to preserve competition and prevent markets from being monopolized," says George A. Hay, Charles Frank Reavis Sr. Professor of Law and professor of economics at the Cornell Law School. "If we had widespread monopoly our economy would be much worse off."

The first of those antitrust laws is the Sherman Antitrust Act, enacted in 1890.

What is the Sherman Antitrust Act?

The Sherman Antitrust Act was intended to "preserve free and unfettered competition as the rule of trade" for the benefit of consumers. It made monopolization and other contracts that unreasonably restrain trade illegal. It is one of three core federal antitrust laws, along with the Clayton Antitrust Act and the Federal Trade Commission Act.

The Sherman Act was named for Sen. John Sherman of Ohio, who was considered an expert on regulating commerce. It was signed into law by President Benjamin Harrison on July 2, 1890.

Some states had already passed similar laws, but their scope was limited to intrastate business, whereas the Sherman Antitrust Act was applied across the nation.

There are three main parts of the Sherman Act:

• The first defines and bans various forms of anticompetitive conduct. It makes forming a trust or contract that restrains trade or conspiring to restrain trade among US states and with foreign nations illegal.
• The second makes monopolizing, attempting to monopolize, or conspiring to monopolize trade or commerce a felony.
• The third extends these provisions to include the District of Columbia and all US territories.

"The most important application of section one is to make price-fixing agreements between or among competing sellers unlawful," Hay says. "While price fixing does not create monopoly - literally a single seller - it results in prices that a monopolist would charge, prices much higher than would prevail under competition."

The second section makes it unlawful to monopolize a part of commerce. "Basically it covers situations where large firms try to drive smaller competitors out of the market by various anticompetitive tactics, such as pricing below cost," Hay says.

There are other practices some people may think are innocent that actually violate the Sherman Act, says Mark Grady, a UCLA law professor. These include, "protests against low wages by people who are ineligible for union membership."

The Federal Trade Commission (FTC) enforces the Sherman Act and other antitrust laws. It monitors businesses and challenges them when they're suspected of antitrust activities. The FTC reviews all major mergers and agreements, analyzing their potential effects on consumers and competition.

While great in theory, the Sherman Act proved too vague in practice. For instance, it didn't clearly define key terms such as "monopoly" and "trust," and left up for interpretation what constitutes "unreasonable" restraint of trade. This left loopholes through which corporations could argue their defense. As a result, Congress passed the Clayton Antitrust Act in 1914 to amend the Sherman Act.

The Sherman Antitrust Act vs. Clayton Antitrust Act

The Clayton Act strengthens the Sherman Act by clarifying key points in and prohibiting other harmful practices that the Sherman Act does not address, such as mergers and interlocking directorates when one person makes business decisions for competing companies.

Hay says the most significant provision that supplements the Sherman Act deals with mergers, primarily between competitors. "The Act says a merger is unlawful if the effect may be substantially to lessen competition," he says. "It is mostly forward-looking in that it allows the government to block a merger that has not happened yet if the predicted effect is that competition may be harmed."

The Clayton Act also created new ways of suing under the Sherman Act, UCLA's Grady notes. It allowed private parties to sue for triple damages if they have been harmed by conduct in violation of either the Clayton Act or the Sherman Act.

Later, amendments further strengthened the Clayton Act, such as the Robinson-Patman Act amendment of 1936, making it illegal for merchants to use certain discriminatory pricing in their dealings with each other.

In 1950, the Celler-Kefauver Act extended the breadth of antitrust laws to include all forms of mergers that substantially reduced competition through monopolization. It also prevented one firm from gaining stock or physical assets in another firm if doing so would inhibit competition.

Then in 1976, the Hart-Scott-Rodino Antitrust Improvements amendment required companies to notify the government before engaging in a large mergers or acquisitions.

Understanding antitrust laws

These US antitrust laws are designed to preserve competition in the marketplace. Consumers benefit from competition as it keeps prices low and leads to more and higher-quality options. Without the antitrust laws, businesses could form monopolies allowing them to have outsized control over market prices and the availability of goods.

"Our system of enforcing the antitrust laws is complex," Hay says. "There are two federal agencies charged with maintaining competition: the Antitrust Division of the US Department of Justice and the Federal Trade Commission. But in addition, each of the 50 states has laws resembling the federal laws. And on top of that, individuals or companies injured as the result of other entities violating the laws can bring a private action to recover damages."

The financial takeaway

The Sherman Act was the first antitrust law passed by Congress in an attempt to preserve competition in the open market. It was later deemed too vague and amended by the Clayton Act, which gives individuals the right to sue for triple damages if they have been harmed by actions that violate either the Sherman Act or Clayton Act.

"The most significant takeaway for the average consumer is that the antitrust laws serve to maintain prices at competitive levels," says Hay. "Not only are consumers better off, but since consumers buy more when prices are lower, workers and suppliers of inputs also benefit."