The Sherman Antitrust Act of 1890 was designed to prevent the concentration of economic power in the hands of a few firms and individuals. Along with the Interstate Commerce Act of 1887, the Sherman Act (named after its sponsor, Senator John Sherman of Ohio) was one of the first major efforts by the U.S. government to constrain the power of leaders in the American Industrial Revolution.
Beginning in the mid-19th century, large manufacturing companies and combinations of companies gained greater control of the American economy. Referred to as the “robber barons,” industrialists including Andrew Carnegie, John D. Rockefeller, William Henry Vanderbilt, and others engaged in a variety of activities to maximize their gains, usually by restraining competition. Dominant firms often conspired to monopolize markets and eliminate competitors, actions that were not new to legal experts. In 1414 Englishman John Dyer was accused of agreeing not to compete within his town for half a year. In 1711 the English case of Mitchel v. Reynolds established the rule that not all agreements restraining trade were illegal, only the unreasonable ones. This became known as the rule of reason, by which general restraints designed to limit competition were illegal. The Sherman Act contains only two important sections.

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine nor exceeding one million dollars if a corporation, or, if any other person, one hundred thousand dollars or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding one million dollars if a corporation, or, if any other person, one hundred thousand dollars or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.
The Sherman Act allows both criminal and civil cases to be brought against parties. The federal government can pursue criminal prosecutions, and a private party can sue civilly for damages. To encourage civil suits, the act allows private parties to collect treble (three times) damages if they prevail in a lawsuit.
Antitrust laws are tied to economic theory. Economists argue competition encourages economic efficiency. Producers provide what consumers most want and do so using resources in their most productive capacity. Those firms that do the best job of providing for consumers’ needs in least-cost manner prosper and do not decline or disappear from the market. The natural outcome is that some firms will expand and eventually dominate markets where they are the most efficient producers. Often as companies become very large, they lose their competitive edge, either by losing touch with consumer needs or by expanding beyond their areas or levels of productive efficiency. This leads to opportunities for new firms to enter markets, revitalizing those markets through competition. The Austrian school of economic thought calls this process “creative destruction.”
If, however, the large firm can build effective barriers to entry, it can continue to dominate a market. The Sherman Act was designed to address this problem. Not all economists or antitrust lawyers agree on when to enforce the act. The “traditional” school, associated with Harvard University, condemns any concentration of economic power. They tend to scrutinize any proposed merger for potential adverse effects on the dynamic benefits of having many independent firms in a market. The Chicago school (University of Chicago) of thought focuses on economic efficiency, claiming that large firms are not necessarily anticompetitive. According to the Chicago school, if large firms can allocate resources more efficiently, they should not be subject to antitrust challenges.
The Antitrust Division of the U.S. Justice Department has primary responsibility for enforcement of the Sherman Act. Enforcement has varied depending on the political party in control of the executive branch of the federal government and its economic philosophy. Generally, the Chicago school, advocating a more lenient approach to antitrust enforcement, dominated antitrust policy during the 1980s, while Harvard’s traditional approach was more prevalent in the 1970s and 1990s.
While the Sherman Act applies to most interstate commerce, a number of activities and specific groups are exempt from the act. As authors Bruce Fisher and Michael Phillips suggest, “the reasons these areas are exempt run the gamut from pure political power to policy reasons.” Exempt areas include

• most labor union activities. Logically the goal of unions is to increase their benefits to workers through bargaining power with employers. Initially the Sherman Act was used against the Danbury Hatters (Loewe v. Lawlor, 1908) who attempted to use boycotts to pressure the company.
  
• intrastate activities having no effect on interstate commerce. The federal government has no authority to regulate intrastate commerce, but most activities by firms of any size, impact interstate commerce and therefore makes them subject to federal antitrust laws.
  
• farmer and fisherman organizations. Under the Capper- Volstead Act and Fisheries Cooperative Marketing Act (1934), fishermen and farmers can organize (see cooperative) to increase their market power, either through selling collectively or buying collectively.
  
• export associations. U.S. companies can create associations to increase their market power in international trade. The federal government allows this otherwise anticompetitive activity in response to foreign governments’ support and subsidies of domestic companies.
  
• baseball. In an historic oddity, the actions of professional baseball clubs are exempt from antitrust regulation. This allows baseball club owners to meet and determine where clubs will be located and approve transfers of clubs from one city to another.
  
• certain regulated industries. Some industries, like insurance, which are regulated by other federal agencies, are exempt from antitrust regulation.
  
• small businesses. Under the Small Business Act of 1953, small businesses are allowed to engage in certain actions that would otherwise be considered antitrust violations.

Certain actions are considered “per se”—that is, obviously harmful violations of the Sherman Act. These include horizontal division of markets, horizontal price fixing, vertical price fixing, group boycotts, and certain tying contracts. Horizontal division of markets occurs when firms divide up markets geographically. For example, sales representatives of competing firms often wind up staying in the same hotels. If two sales reps agreed, “You take Tennessee and I take Kentucky,” they are engaging in horizontal division of markets. If the two sales reps agreed to charge the same price to customers and compete on a nonprice basis, they are engaging in horizontal price fixing.
Vertical price fixing occurs when participants in the marketing chain (manufacturers, wholesalers, retailers) agree to set prices, called resale price maintenance. If a manufacturer refuses to sell to a wholesaler unless it agrees to charge set prices, the manufacturer is potentially impairing competition. The enforcement of resale price maintenance, as part of the Sherman Act, has varied over time; until 1937 it was a per se violation. The 1937 Miller-Tydings Act excluded resale price maintenance from the Sherman Act, but in 1976 Congress repealed the Miller-Tydings Act.
Group boycotts, usually involving groups of sellers refusing to sell to certain wholesalers, are also illegal under the Sherman Act. A seller can refuse to sell to a particular buyer or group of buyers without violating the act. If a group of sellers organize to boycott certain types of buyers, often discount companies, they are in violation of the Sherman Act.
Some tying agreements, whereby the seller requires the buyer to purchase certain items as a condition for purchasing other items, are illegal under the Sherman Act. An agreement involving patented products or unique items are more likely to be per se violations of the act.
See also Clayton Antitrust Act; Interstate Commerce Commission; monopoly.