The Federal Trade Commission and the Sherman Act

Abstract

The FTC has explicit antitrust authority to enforce the Clayton Act, although not the Sherman Act. More than a half century ago, however, the Supreme Court held that the FTC Act’s prohibition of “unfair methods of competition” reaches everything the Sherman Act reaches and also a “penumbra” of practices that are not technical Sherman Act violations. That view, which had fallen into disuse in recent decades, is now being revived.

This essay defends a limited version of that “penumbra” view and suggests several applications. First, while both Sherman Act provisions are open ended in their coverage, they have limitations. Section 1 reaches conduct only upon a finding of agreement, while §5’s “unfair methods of competition” contains no such limitation. Using §5 to reach coordinated interaction in the absence of agreement has been attempted before with little success, but there are ways that it could be given new life. A second limitation is that §2 of the Sherman Act reaches unilateral conduct only if it “monopolizes” or creates a dangerous probability of doing so. Section 2 has no application to “leveraging” situations that European competition law’s “abuse of a dominant position” formulation permits. Such a use of the FTC Act also has real possibilities if properly limited.

There are also compelling institutional reasons why the FTC can reach beyond the Sherman Act. It has advantages in procuring discovery that can avoid the pleading problems that the Supreme Court’s Twombly and Iqbal decisions have produced. The FTC commands more expertise than courts and does not use juries. Most importantly, because private parties cannot enforce §5, the FTC can move more aggressively without worrying about excessive private litigation from tagalong suits. Finally, the social cost of an error is much lower when the only intervention is a cease and desist order against a challenged practice.

Historically the FTC has not realized these possibilities, mainly because of a tendency to pursue practices that posed no real threat to competition. The FTC may be on the verge of making this mistake again in its recent challenge to Intel Corporation’s pricing practices. The relief that the FTC is suggesting in its complaint is particularly problematic, requiring Intel to engage in irrational pricing behavior for the benefit of rivals. A likely result is a duopoly or oligopoly in which Intel and its rivals will all earn high profits but at consumers’ expense.

Keywords: Antitrust, Federal Trade Commission, Sherman Act, predatory pricing, discounts, bundled discounts

JEL Classification: A12, D02, D11, D21, D43, K19, K21, K41, K42