There used to be only one way to buy or sell a house. But today’s real estate professionals are changing the way they do business: offering potential buyers the chance to view detailed listings online, using websites to gather leads on potential customers, and using the Internet to match buyers and sellers.
And some are changing the “menu” of services they’re offering. More and more, consumers can choose among real estate professionals who do business on a “fee per service” basis and others who provide the full complement of services. There’s no doubt about it: Increased competition in any industry — including real estate — leads to more choices, better prices, and stepped-up service for buyers and sellers.
The Federal Trade Commission works for a competitive marketplace, protecting healthy competition so that consumers have access to a wider variety of goods and services and businesses have a chance to compete on the merits of their work. As part of this program, the FTC enforces laws against individuals or companies that try to stifle competition. This website offers information for consumers, real estate professionals, attorneys, advocates, and legislators on the FTC’s recent initiatives to encourage competition in the real estate industry
The Antitrust Laws
Congress passed the first antitrust law, the Sherman Act, in 1890 as a “comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade.” In 1914, Congress passed two additional antitrust laws: the Federal Trade Commission Act, which created the FTC, and the Clayton Act. With some revisions, these are the three core federal antitrust laws still in effect today.
The antitrust laws proscribe unlawful mergers and business practices in general terms, leaving courts to decide which ones are illegal based on the facts of each case. Courts have applied the antitrust laws to changing markets, from a time of horse and buggies to the present digital age. Yet for over 100 years, the antitrust laws have had the same basic objective: to protect the process of competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep prices down, and keep quality up.
Here is an overview of the three core federal antitrust laws.
The Sherman Act outlaws “every contract, combination, or conspiracy in restraint of trade,” and any “monopolization, attempted monopolization, or conspiracy or combination to monopolize.” Long ago, the Supreme Court decided that the Sherman Act does not prohibit every restraint of trade, only those that are unreasonable. For instance, in some sense, an agreement between two individuals to form a partnership restrains trade, but may not do so unreasonably, and thus may be lawful under the antitrust laws. On the other hand, certain acts are considered so harmful to competition that they are almost always illegal. These include plain arrangements among competing individuals or businesses to fix prices, divide markets, or rig bids. These acts are “per se” violations of the Sherman Act; in other words, no defense or justification is allowed.
The penalties for violating the Sherman Act can be severe. Although most enforcement actions are civil, the Sherman Act is also a criminal law, and individuals and businesses that violate it may be prosecuted by the Department of Justice. Criminal prosecutions are typically limited to intentional and clear violations such as when competitors fix prices or rig bids. The Sherman Act imposes criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million.
The Federal Trade Commission Act bans “unfair methods of competition” and “unfair or deceptive acts or practices.” The Supreme Court has said that all violations of the Sherman Act also violate the FTC Act. Thus, although the FTC does not technically enforce the Sherman Act, it can bring cases under the FTC Act against the same kinds of activities that violate the Sherman Act. The FTC Act also reaches other practices that harm competition, but that may not fit neatly into categories of conduct formally prohibited by the Sherman Act. Only the FTC brings cases under the FTC Act.
The Clayton Act addresses specific practices that the Sherman Act does not clearly prohibit, such as mergers and interlocking directorates (that is, the same person making business decisions for competing companies). Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.” As amended by the Robinson-Patman Act of 1936, the Clayton Act also bans certain discriminatory prices, services, and allowances in dealings between merchants. The Clayton Act was amended again in 1976 by the Hart-Scott-Rodino Antitrust Improvements Act to require companies planning large mergers or acquisitions to notify the government of their plans in advance. The Clayton Act also authorizes private parties to sue for triple damages when they have been harmed by conduct that violates either the Sherman or Clayton Act and to obtain a court order prohibiting the anticompetitive practice in the future.
In addition to these federal statutes, most states have antitrust laws that are enforced by state attorneys general or private plaintiffs. Many of these statutes are based on the federal antitrust laws.
Price fixing is an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms. Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor. When consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.
A plain agreement among competitors to fix prices is almost always illegal, whether prices are fixed at a minimum, maximum, or within some range. Illegal price fixing occurs whenever two or more competitors agree to take actions that have the effect of raising, lowering or stabilizing the price of any product or service without any legitimate justification. Price-fixing schemes are often worked out in secret and can be hard to uncover, but an agreement can be discovered from “circumstantial” evidence. For example, if direct competitors have a pattern of unexplained identical contract terms or price behavior together with other factors (such as the lack of legitimate business explanation), unlawful price fixing may be the reason. Invitations to coordinate prices also can raise concerns, as when one competitor announces publicly that it is willing to end a price war if its rival is willing to do the same, and the terms are so specific that competitors may view this as an offer to set prices jointly.
Not all price similarities, or price changes that occur at the same time, are the result of price fixing. On the contrary, they often result from normal market conditions. For example, prices of commodities such as wheat are often identical because the products are virtually identical, and the prices that farmers charge all rise and fall together without any agreement among them. If a drought causes the supply of wheat to decline, the price to all affected farmers will increase. An increase in consumer demand can also cause uniformly high prices for a product in limited supply.
Price fixing relates not only to prices, but also to other terms that affect prices to consumers, such as shipping fees, warranties, discount programs, or financing rates. Antitrust scrutiny may occur when competitors discuss the following topics:
Present or future prices
Terms or conditions of sale, including credit terms
Identity of customers
Allocation of customers or sales areas
A defendant is allowed to argue that there was no agreement, but if the government or a private party proves a plain price-fixing agreement, there is no defense to it. Defendants may not justify their behavior by arguing that the prices were reasonable to consumers, were necessary to avoid cut-throat competition, or stimulated competition.
Example: A group of competing optometrists agreed not to participate in a vision care network unless the network raised reimbursement rates for patients covered by its plan. The optometrists refused to treat patients covered by the network plan, and, eventually, the company raised reimbursement rates. The FTC said that the optometrists’ agreement was illegal price fixing, and that its leaders had organized an effort to make sure other optometrists knew about and complied with the agreement.
An agreement to restrict production, sales, or output is just as illegal as direct price fixing, because reducing the supply of a product or service drives up its price. For example, the FTC challenged an agreement among competing oil importers to restrict the supply of lubricants by refusing to import or sell those products in Puerto Rico. The competitors were seeking to pressure the legislature to repeal an environmental deposit fee on lubricants, and warned of lubricant shortages and higher prices. The FTC alleged that the conspiracy was an unlawful horizontal agreement to restrict output that was inherently likely to harm competition and that had no countervailing efficiencies that would benefit consumers.
Q: The gasoline stations in my area have increased their prices the same amount and at the same time. Is that price fixing?
A: A uniform, simultaneous price change could be the result of price fixing, but it could also be the result of independent business responses to the same market conditions. For example, if conditions in the international oil market cause an increase in the price of crude oil, this could lead to an increase in the wholesale price of gasoline. Local gasoline stations may respond to higher wholesale gasoline prices by increasing their prices to cover these higher costs. Other market forces, such as publicly posting current prices (as is common with most gasoline stations), encourages suppliers to adjust their own prices quickly in order not to lose sales. If there is evidence that the gasoline station operators talked to each other about increasing prices and agreed on a common pricing plan, however, that may be an antitrust violation.
Q: Our company monitors competitors’ ads, and we sometimes offer to match special discounts or sales incentives for consumers. Is this a problem?
A: No. Matching competitors’ pricing may be good business, and occurs often in highly competitive markets. Each company is free to set its own prices, and it may charge the same price as its competitors as long as the decision was not based on any agreement or coordination with a competitor.
Whenever business contracts are awarded by means of soliciting competitive bids, coordination among bidders undermines the bidding process and can be illegal. Bid rigging can take many forms, but one frequent form is when competitors agree in advance which firm will win the bid. For instance, competitors may agree to take turns being the low bidder, or sit out of a bidding round, or provide unacceptable bids to cover up a bid-rigging scheme. Other bid-rigging agreements involve subcontracting part of the main contract to the losing bidders, or forming a joint venture to submit a single bid.
Market Division or Customer Allocation
Plain agreements among competitors to divide sales territories or assign customers are almost always illegal. These arrangements are essentially agreements not to compete: “I won’t sell in your market if you don’t sell in mine.” The FTC uncovered such an agreement when two chemical companies agreed that one would not sell in North America if the other would not sell in Japan. Illegal market sharing may involve allocating a specific percentage of available business to each producer, dividing sales territories on a geographic basis, or assigning certain customers to each seller.
For more information see: FTC
Any company may, on its own, refuse to do business with another firm, but an agreement among competitors not to do business with targeted individuals or businesses may be an illegal boycott, especially if the group of competitors working together has market power. For instance, a group boycott may used to implement an illegal price-fixing agreement. In this scenario, the competitors agree not to do business with others except on agreed-upon terms, typically with the result of raising prices. An independent decision not to offer services at prevailing prices does not raise antitrust concerns, but an agreement among competitors not to offer services at prevailing prices as a means of achieving an agreed-upon (and typically higher) price does raise antitrust concerns.
For more information see: FTC
Other Agreements Among Competitors
Other agreements among competitors that are not inherently harmful to consumers are examined under a flexible “rule of reason” standard that attempts to determine their overall competitive effect. Here the focus is on the nature of the agreement, the harm that could arise, and whether the agreement is reasonably necessary to achieve procompetitive benefits.
Below are a few examples of these types of dealings with competitors that may pose competitive problems.
Agreements to restrict advertising
Truthful advertising is important in a free market system because it helps consumers compare the price and quality of products offered by competing suppliers. The FTC Act itself prohibits advertising that is false or deceptive, and the FTC vigorously enforces this standard to empower consumers to make choices in the marketplace. Competitor restrictions on the amount or content of advertising that is truthful and not deceptive may be illegal if evidence shows the restrictions have anticompetitive effects and lack reasonable business justifications.
Example: The FTC challenged a professional code adopted by a national association of arbitrators that banned virtually all forms of advertising and soliciting clients. In a consent agreement with that organization, the rules were changed so that individual members were not barred from advertising truthful information about their prices and services.
Codes of ethics
The antitrust laws do not prohibit professional associations from adopting reasonable ethical codes designed to protect the public. Such self-regulatory activity serves legitimate purposes, and in most cases can be expected to benefit, rather than to injure, competition or consumers. In some instances, however, ethical rules may be unlawful if they unreasonably restrict the ways professionals may compete. For example, a mandatory code of ethics that prevents members from competing on the basis of price or on terms other than those developed by the trade group can be an unreasonable restraint on competition.
Example: The FTC challenged an organization of store planners that sought to prevent its members from offering free or discounted design or planning services. The group’s mandatory code of ethics discouraged price competition among the planners to the detriment of consumers.
Exclusive member benefits
Business associations made up of competitors can offer their members important services and benefits that improve efficiency and reduce costs. These services and benefits can range from general industry promotion to high-tech support. But when an association of competitors withholds these benefits from would-be members that offer a competitive alternative that consumers want, the restriction may harm competition and keep prices high. This problem only occurs when members of the association have a significant market presence and it is difficult for non-members to compete without access to association-sponsored benefits.
Example: Several antitrust cases have challenged realtor board rules that restricted access to Multiple Listing Services (MLS) for advertising homes for sale. The MLS system of combining the home listings of many brokers has substantial benefits for home buyers and sellers. The initial cases invalidated realtor board membership rules that excluded certain brokers from the MLS because access to the MLS was considered key to marketing homes. More recently, FTC enforcement actions have challenged MLS policies that permit access but more subtly disfavor certain types of brokerage arrangements that offer consumers a low-cost alternative to the more traditional, full-service listing agreement. For instance, some brokers offer a limited service model, listing a home on the local MLS for a fee while handing off other aspects of the sale to the seller. The FTC has challenged the rules of several MLS organizations that excluded these brokers from popular home sale web sites. These rules limited the ways in which brokers could conduct their business and denied home sellers the benefit of having different types of listings.