Competition Law is a statutory creation of the early 20th century that created civil and criminal penalties against businesses that employed certain business methods to drive competitors out of business, which had the effect of allowing the surviving business to raise prices to the consumer that would not be possible in a competitive environment.
The primary target of early competition laws was the Standard Oil Trust. As petroleum became a more important commodity in the late 19th century, several companies rushed into the business to explore for and exploit oil resources. This caused market prices to fall, which hurt the profits of the larger companies. These companies responded by selling oil for less than their competitors could match in the competitor's local area (using their profits from other regions to pay for their losses), and then offering to buy their competitors out. As a result of the application of these laws, Standard Oil was split up into several smaller companies (which are now Exxon, Texaco, Mobil, and Sohio).
Competition legislation generally prohibits:
- The formation of monopolies in any industry, unless they are regulated by the state (such as an electric utility). Monopolies are usually broken up into smaller operating units. AT&T was the last large company to be split up in this manner to encourage more competition in telephone services.
- The use of predatory pricing (consistently selling a product at a loss). Such actions usually lead to fines and civil penalties.