Antitrust and Regulation

Abstract:     
More than a century ago, the federal government started controlling competition, first railroads through the Interstate Commerce Act and then the general economy under the Sherman Act. The Commerce Act assigned primary responsibility to the first great federal agency, the Interstate Commerce Commission, while the Sherman Act relied for its implementation on federal courts of general jurisdiction. Since that time, there has been an ongoing struggle to formulate the appropriate policy for controlling competition and to determine the right balance between antitrust and regulation for implementing that policy.

Regulation and antitrust are two competing mechanisms to control competition. The early history in which special courts were established and then abolished, and in which the FTC was created illustrate this point. The relative advantages and disadvantages of each mechanism became clearer over time. Regulation produced cross-subsidies and favors to special interests, but was able to specify prices and specific rules of how firms should deal with each other. Antitrust, especially when it became economically coherent within the past 30 years or so, showed itself to be reasonably good at promoting competition, avoiding the favoring of special interests, but not good at formulating specific rules for particular industries. The partial and full deregulation movement was a response to the recognition of the relative advantages of regulation and antitrust. This does not mean that no sector will be regulated, but rather that competition, constrained only by antitrust, will be used over more activities, even in regulated industries.

Aside from being viewed as substitutes, antitrust and regulation can also be viewed as complements in which the activities of an industry can be subject to both regulatory and antitrust scrutiny. In this way, the complementary use of regulation and antitrust can assign control of competition to courts and regulatory agencies based on their relative strengths, and in some settings, antitrust can act as a constraint on what regulators can do. The trends in network industries indicate that regulators, not antitrust courts, will bear the responsibility for formulating interconnection policies in partially deregulated industries, but antitrust will remain in the background as a club that firms can use if regulators allow incumbents to acquire market power either through merger or predatory acts. The history shows that at least for the United States, the increased use of the Sherman Act instead of regulation to control competition, and when necessary, the complementary use of the two, has brought benefits to consumers.

Keywords: Interstate Commerce Act, Sherman Act, federal regulation, restraint of trade, monopoly

Working Paper Series