Question

Which of the following is illegal under the Sherman Act? a. Attempts to monopolize b. Price-fixing c. Formation of cartels d. All of the above are illegal.

Short answer

The correct answer is (d) All of the above are illegal under the Sherman Act, as attempts to monopolize, price-fixing, and formation of cartels are all considered anti-competitive behavior that interferes with free-market competition.

Step-by-step solution

Understand the options

According to the Sherman Act, it's important to note that any attempts to stifle free-market competition are generally viewed as illegal. 1. Attempts to monopolize: If a company is trying to establish a monopoly over a certain market or product, it is generally viewed as illegal as per the Sherman Act. 2. Price-fixing: When companies conspire to set prices for a certain product or service instead of letting market forces determine the cost, they are also violating the Sherman Act. 3. Formation of cartels: A cartel, a group of independent market participants who collude to regulate prices, restrict supply, or hinder competition, is also considered illegal under the Sherman Act because it interferes with free-market competition.

Select the correct answer

Every option here represents a form of anti-competitive behavior that the Sherman Act is designed to prevent. Therefore, in this case, the correct answer would be: (d) All of the above are illegal.

Key concepts

Attempts to Monopolize

In the context of the Sherman Act, attempts to monopolize refer to actions by a company that purposely try to gain exclusive control over a particular market or type of product. These actions go against the core principle of maintaining a competitive marketplace which is the bedrock of a healthy economy. Such attempts can include aggressive acquisition of competitors, setting predatory prices to drive competitors out of the market, or implementing exclusive contracts that prevent competitors from entering the market.

For instance, if a technology company tried to purchase all small competitors to be the sole provider of a certain type of software, it could be considered an attempt to monopolize that market. The key aspect the courts would look at is the intention behind the company's actions and whether those actions have a dangerous probability of creating a monopoly. This is not just harmful to competitors, but also to consumers, who may face reduced choice and increased prices as a result.

Price-fixing

Price-fixing occurs when competing companies agree on prices or price levels rather than competing with each other, which essentially removes the benefits of free-market competition. These agreed-upon prices are often at a level that is higher than what would naturally occur in a competitive market. This collusion is not limited to just setting a specific dollar amount; it can also include agreements to maintain certain price ranges, setting a standard discount rate, or agreeing to a fixed increase in prices.

Say, for example, if competing gasoline stations in a town agree to sell gas at the same price per gallon, even though their costs may vary, they may be engaging in price-fixing. This behavior denies consumers the chance to benefit from natural price wars that could lower the cost of gasoline.

Formation of Cartels

A cartel is a formal agreement among competing firms to control prices or production in a particular market, thus restricting competition. Cartels are nefarious in nature because they manipulate the free market by artificially inflating prices, reducing output, or dividing markets, which, in turn, harms consumers and other businesses.

An infamous example is the Organization of Petroleum Exporting Countries (OPEC), often cited as a cartel because its member countries collaborate on setting oil production levels, which can influence oil prices globally. Cartels like these are illegal in many countries as they violate antitrust laws by stripping away the consumers' rights to fair prices and choices.

Anti-competitive Behavior

The term anti-competitive behavior encompasses a wide range of activities that companies might engage in to reduce or eliminate competition. This includes, but is not limited to, the practices of monopolizing, price-fixing, and forming cartels. Other tactics might include exclusive dealing contracts, tying agreements, and certain forms of predatory pricing or market division.

Examples of anti-competitive behavior can be subtle, such as a dominant company setting below-cost pricing to force out competitors, a practice known as predatory pricing. This creates an environment in which it is difficult for newer companies to thrive or even for established ones to maintain their market share. Over time, this leads to fewer choices for consumers and can stifle innovation.