This past week, Senator Amy Klobuchar, now the head of the Senate Judiciary subcommittee on antitrust, proposed the most comprehensive legislative reform of antitrust law since the passage of the Clayton Act in 1914. That statute extended the reach of antitrust law so that it covered not just Sherman Act cases of monopolies and cartels in restraint of trade, but also any merger or consideration that, to quote the language of Section 7 of the Clayton Act, might “substantially lessen competition” or “tend to create a monopoly.”

To Senator Klobuchar, that 107-year-old statutory standard is not sufficient for dealing with antitrust law in the digital economy. She has insisted that breaking up companies like Facebook “has to be on the table.” In a blunt statement, she projects her optimistic vision:  “When we talk about structural remedies and breaking things up, those companies would then be unleashed to do even more”—but she doesn’t say how that welcome outcome would be achieved. Indeed, if a breakup would have that positive effect, then shareholders of those companies should be demanding that management adopt that course of action to maximize the value of their holdings. But underlying her analysis is the tacit assumption that there are no efficiency gains from the integrated operation of a single firm, let alone from any future merger or acquisition.

Unfortunately, she offers no systematic explanation as to why that negative judgment is correct. Nor does she explain exactly why the current system of merger evaluation is deficient. In his classic 1968 article, “Economies as an Antitrust Defense: The Welfare Tradeoffs,” the late Nobel laureate Oliver Williamson explained why it was not possible to have a presumptive condemnation of mergers. On the one side, mergers can increase industry concentration, exerting the usual negative effects on consumer welfare, including higher prices and perhaps lower quality. But on the positive side are the cost savings from the merger brought through efficiency gains in operations. The challenge is to measure and weigh their relative magnitudes.

It takes a good deal of information to evaluate that tradeoff in hard cases. Nonetheless, there are good economic reasons to set the presumption in favor of mergers or acquisitions. First, efficiency gains are likely to occur in virtually all cases because of the obvious synergies that arise when two complementary companies come together. If these companies are of relatively small size, any increase in concentration is likely to be minor when measured by the standard Herfindahl-Hirschman Index, which generally opposes “horizontal” mergers when four or fewer companies compete in a given industry. But beyond those limited cases, the efficiency gains typically outweigh monopolization losses, especially in the acquisition of small firms.

But this traditional understanding is thrown to the wind in Klobuchar’s “Consolidation Prevention and Competition Promotion Act.” It is of course correct, as the act states, that high concentration can induce “higher prices, lower quality, significantly less choice, reduced innovation, foreclosure of competitors,” and increased entry barriers. But at no point does the legislation mention any of the efficiency gains that could offset these losses by producing lower prices, better quality, more choice and greater innovation.

The bill’s misstatement of the probable economic consequences of mergers thus skews the analysis in the wrong direction. Even worse, it advances unsupported assertions about the effect of M&As on the political economy of the United States.

It is simply not the case that market concentration has only bad political effects. Strong firms often resist tariffs and other counterproductive legislation, such as efforts to strengthen monopoly unions. At the same time, strong economic concentration does not easily translate into political power. While large firms do weigh in to the political process, the late Fred McChesney was fond of noting in his book Money for Nothing that major corporations are highly vulnerable to political actors: they can be hauled before investigative committees or targeted with so-called “milker bills,” which use the possibility of higher taxation or increased regulation to get firms to capitulate on other issues.

Klobuchar then compounds the mistake by insisting that the rise of mergers will hamper small business growth, decrease innovation, and deter innovation. But none of these effects will happen if the merger is an efficient arrangement under the Williamson standard. Large firms do not possess an invulnerable position that insulates them from upstart competition. They drive hard bargains, as do all companies, but that doesn’t necessarily mean that they hurt suppliers and employees by offering “unreasonably” low prices or wages. Many suppliers are not tethered to a single industry but sell to firms in a wide range of different industries. Workers can also sell their services in a wide variety of businesses across different industry groups. The large firms targeted by Klobuchar in turn gain market share because they offer consistently low prices, hardly an antitrust violation. Some of these large tech firms like Amazon employ thousands of workers, and others enable their customers to grow. As a first approximation, more efficient product and labor markets will improve the position of both suppliers and workers across the globe.

The Klobuchar bill then compounds its error by “finding” that “horizontal consolidation, vertical consolidation, and conglomerate mergers all have potential to cause anticompetitive harm.” But the potential is vastly overrated. As noted earlier, only a small fraction of horizontal consolidations hold any serious risk of difficulty. Vertical mergers (i.e., those among parties in different parts of the production chain) often have positive efficiency gains, as has been well understood since United Shoe Machinery (USM) vertically integrated seven firms at different stages of the production process in the early 1900s. Vertical mergers eliminate holdout problems that can arise when sequential corporations each seek to garner larger and larger fractions of the economic gain. Vertical mergers also improve consumer welfare by making it easier for consumers to work with a single supplier, as when dealing with defects in a finished product. It’s worth noting that the lawyer who orchestrated the USM deals was none other than Louis Brandeis, who has been lionized by Senator Klobuchar herself for his generally progressive views, but who also had this conservative instinct as a business lawyer.

Klobuchar’s bad diagnosis leads to a bad cure. The first statutory move is to replace the “substantially lessen” standard of the Clayton Act with one of “materiality,” which receives a wildly broad definition that attacks “an acquisition [that] may cause more than a de minimis amount of harm to competition.” To make matters worse, the bill does not look at the impact of the acquisition as a whole but allows a challenge to the firm if a significant increase in concentration takes place in “any line of commerce.” But most large firms work in literally hundreds of different markets. Finally, the legislation shifts the burden of proof in a broad array of transactions to require that “the acquiring and acquired person establish, by a preponderance of evidence, that the effect of the acquisition” has no more than a de minimis impact on competition in both the long and the short run. Allowing the two firms to meet their burden by showing competitive benefits should in principle be allowed, but such questions will have to be worked out in litigation, adding to the transitional uncertainty of the Klobuchar bill.

The effect of the legislation may mean that virtually any merger by a major industry player could be blocked on the ground that it somehow negatively affects some segment of the market. But we should also consider the social losses that could arise from blocking mergers that should be allowed and allowing mergers that should be blocked.

One likely consequence of this bill, should it pass, would be to place near-impossible burdens on larger firms seeking to acquire smaller firms. This won’t hurt only large corporations. It is commonplace for startups to seek larger partners down the road, and blocking acquisitions necessarily hampers the ability of small companies to be bought out, reducing their incentive to form in the first place.

The net effect is exactly the opposite of what both Senator Klobuchar wants—a vital economy in the tech sector and everywhere else. Right now, there should be no disputing the marvelous and enduring advances that have been made by large and small firms alike along the very dimensions that Senator Klobuchar values, such as lower prices, higher quality, more innovation, and better wages. There is no credible evidence that the current antitrust laws are incapable of preserving competition. But there is a massive risk that the Klobuchar bill will wreck the dynamic economy she seeks to preserve.

© 2021 by the Board of Trustees of Leland Stanford Junior University.