Congress passed two laws in 1914 to overcome weaknesses in the Sherman Act. The more important of these, the Clayton Act, addresses problems of mergers, interlocking directorates, price discrimination, and tying contracts. The Federal Trade Commission Act outlaws unfair methods of competition in commerce and establishes the FTC, an agency intended to enforce the Clayton Act.
Section 2 of the Clayton Act prohibits sellers from discriminating in price among business customers, unless cost differentials or competitive pressure justifies the price differentials. As a primary goal, the act seeks to prevent a strong regional or national firm from employing selective price cuts to drive weak local firms out of business. It was thought that once competitors in one market were eliminated, national firms could then charge monopoly prices and use resulting excess profits to subsidize cutthroat competition in other areas. The Robinson-Patman Act, passed in 1936, amended the section of the Clayton Act dealing with price discrimination. It declares specific forms of price discrimination illegal, especially those related to chain-store purchasing practices.
Section 3 of the Clayton Act forbids tying contracts that reduce competition. A firm, particularly one with a patent on a vital process or a monopoly on a natural resource, could use licensing or other arrangements to restrict competition. One such method is the tying contract, whereby a firm ties the acquisition of one item to the purchase of another. For example, IBM once refused to sell its business machines. It only rented machines to customers and then required them to buy IBM punch cards, materials, and maintenance service. This had the effect of reducing competition in these related industries. The IBM lease agreement was declared illegal under the Clayton Act, and the company was forced to offer machines for sale and to separate leasing arrangements from agreements to purchase other IBM products.
Finally, although the Sherman Act prohibits voting trusts that lessened competition, interpretation of the act did not always prevent one corporation from acquiring the stock of competing firms and then merging these firms into itself. Section 7 of the Clayton Act prohibits stock mergers that reduce competition. Either the Antitrust Division of the Justice Department or the FTC can bring suit under Section 7 to prevent mergers. If mergers have been consummated prior to the suit, divestiture can be ordered. The Clayton Act also prevents individuals from serving on the boards of directors of two competing companies. So-called competitors having common directors would obviously not compete very hard. Although the Clayton Act made it illegal for firms to merge through stock transactions when the effect is to lessen competition, the law left a loophole. A firm could purchase the assets of a competing firm, integrate the operations into its own, and thus reduce competition. The Celler-Kefauver Act closed this loophole, making asset acquisitions illegal when the effect of such purchases is to reduce competition. By a slight change in wording, it made clear Congress's intent to attack all mergers that threatened competition, whether vertical mergers between buyers and sellers, horizontal and market extension mergers between actual or potential competitors, or purely conglomerate mergers between unrelated firms.
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