If Coca-Cola and Pepsico wanted to merge, the deal would be closely examined by the federal government before it went into effect. The lawyers and economists- in the Department of Justice might well decide that a merger between these two large soft drink companies would make the U.S. soft drink market substantially less competitive and, as a result, would reduce the economic well-being of the country as a whole. If so, the Department of Justice would challenge the merger in court, and if the judge agreed, the two companies would not be allowed to merge. It is precisely this kind of challenge that prevented software giant Microsoft from buying Intuit in 1994.

The government derives this power over private industry from the antitrust laws, a collection of statutes aimed at curbing monopoly power. The first and most important of these laws was the Sherman Antitrust Act, which Congress passed in 1890 to reduce the market power of the large and powerful trusts that were viewed as dominating the economy at the time.

The antitrust laws give the government various ways to promote competition. They allow the government to prevent mergers, such as our hypothetical merger between Coca-Cola and Pepsico. They also allow the government to break up companies. For example, in 1984, the government split up AT&T, the large telecommunications company, into eight smaller companies. Finally, the antitrust laws prevent companies from coordinating their activities in ways that make markets less competitive; we will discuss some of these uses of the antitrust laws in Chapter 16.

Antitrust laws have costs as well as benefits. Sometimes companies merge not to reduce competition but to lower costs through more efficient joint production. These benefits from mergers are sometimes called synergies. For example, many U.S. banks have merged in recent years and, by combining operations, have been able to reduce administrative staff. If antitrust laws are to raise social welfare, the government must be able to determine which mergers are desirable and which are not. That is, it must be able to measure and compare the social benefit from synergies to the social costs of reduced competition. Critics of the antitrust laws are skeptical that the government can perform the necessary cost-benefit analysis with sufficient accuracy.

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