16.3 Antitrust Law and Competition Policy

Rather than regulate firms that set high prices, a government may forbid firms from collectively setting high prices—that is, acting like a cartel (Chapter 11). These laws are called antitrust laws in the United States and competition policies in many other countries.

In the late nineteenth century, cartels, which were then called trusts, were legal and were common in the United States. Oil, railroad, sugar, and tobacco trusts raised prices substantially above competitive levels.5 In response to the trusts’ high prices, the U.S. Congress passed the Sherman Antitrust Act in 1890 and the Federal Trade Commission Act of 1914, which prohibited firms from explicitly agreeing to take actions that reduce competition. ...

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