Cato Policy Analysis No. 323 October 22, 1998

Policy Analysis

The Government's War on Mergers:
The Fatal Conceit of Antitrust Policy

by William F. Shughart II

William F. Shughart II is Frederick A. P. Barnard Distinguished Professor of Economics and holder of the Robert M. Hearin Chair in Business Administration at the University of Mississippi.


Executive Summary

Antitrust is thought by some to be the bulwark of free enterprise. Without the vigilance of the Justice Department and the Federal Trade Commission, so the argument goes, giant corporations would ruthlessly destroy their smaller rivals and soon raise prices and profits at consumers' expense.

But antitrust has a dark side. Opposition to mergers, though in theory based on worries that competition may be impaired, often in practice comes not from consumers whose interests antitrust is supposed to defend, but from competitors faced with the prospect of a larger, more aggressive rival. Because they respond to the demands of competitors, labor unions, and other well-organized groups having a stake in stopping mergers that promise to increase economic efficiency, the antitrust authorities all too often succeed, not in keeping prices from rising, but in keeping them from falling.

The politicization of antitrust is not just a matter of historical curiosity. Politics stalks many of the high-profile cases brought by President Clinton's trustbusters, including Primestar's planned purchase of a key satellite slot as well as the mergers proposed between Staples and Office Depot, WorldCom and MCI, and Lockheed Martin and Northrop Grumman.

When the antitrust authorities intervene to reshape markets at the behest of competitors, private decisions about how best to organize production are displaced by government decisions. Innovative firms are penalized, scale economies are lost, and competition is thwarted, not enhanced.

Full Text of Policy Analysis No. 323 (PDF, 45 pgs, 150 Kb)

1998 The Cato Institute
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