19.2: Historical Development
- Page ID
- 49155
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)The United States economy was founded on the capitalist principle of free enterprise. Free enterprise is a private and consensual system of production and distribution, usually conducted for profit in a competitive environment, that is relatively free of governmental interference. The theory is that, given the freedom, businesses will operate efficiently and be responsive to consumer needs and demands.
The weakness of the free enterprise system is that it assumes that businesses will be ethical and compete with each other fairly. During the Industrial Revolution, powerful businessmen took advantage of the free enterprise system to increase their wealth at the expense of their workers, competitors, and consumers.
These Industrialists bought shares in competing companies then transferred the shares to a trust. The trust then set prices for goods within the industry, determined which companies could operate in a given geographic area, and micromanaged the business operations of companies within an industry. As a result, companies that were not part of the trust went bankrupt, new competitors were prevented from entering the market, and consumer prices rose beyond market requirements.
States tried to stop the abuses of the Industrialists through the trusts. State attempts failed because the US economy was growing beyond state industries to national ones. As a result, national legislation was needed to restore balance to the market. The resulting legislation is called “antitrust law” because its purpose was to break up the power of the Industrialists’ trusts.
In 1890, Congress passed the Sherman Antitrust Act under its power to regulate interstate commerce. The Sherman Antitrust Act (also known as the Sherman Act) prohibits direct or indirect interference with the freely competitive interstate production and distribution of goods. The Act addresses two main concerns:
- Unreasonable restraints on trade between two or more parties; and
- Monopolies.
In 1914, Congress passed the Clayton Act. The Clayton Act amended the Sherman Act and expanded antitrust regulations to prohibit:
- Price discrimination;
- Tying arrangements;
- Exclusive-dealing contracts; and
- Mergers resulting in monopolies or substantially lessening competition.
Congress also passed the Federal Trade Commission Act in 1914. The Federal Trade Commission Act established the Federal Trade Commission (FTC) to protect consumers against deceptive practices and enforce antitrust laws. The Act prohibits false, deceptive, and unfair advertising and trade practices. Some of these practices are discussed in more detail in Chapter 20.
The last major antitrust law is the Robinson-Patman Act, which was passed by Congress in 1936. The Robinson-Patman Act amended the Clayton Act and prohibits price discrimination that hinders competition or that tends to create a monopoly.