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.” The statute plainly does not say that mergers that substantially lessen competition are nevertheless permitted if they advance efficiency or lower prices. The “competition” test of section 7 envisions an ideal of markets in which multiple firms compete for the business of trading partners. The reduction of n firms to n-1 through a merger violates the statute when that reduction in competition exceeds a de minimis threshold left to the courts to determine by reference to congressional purpose.

Yet today the statute is understood in most legal and economic circles in a completely different fashion: as a kind of cost-benefit analysis that prohibits mergers that increase prices—under what I call the “price test,” though it is more familiarly known as the “consumer welfare standard.” Taken to its logical extreme, this view implies that a merger to monopoly—a merger of two firms into one—could be lawful even though plainly the replacement of a duopoly with a monopoly substantially lessens competition, and even more obviously tends to create a monopoly, in the words of the usually overlooked second clause of section 7. This implicit revision of section 7 has weakened merger enforcement, and weaker merger enforcement has been blamed for a range of social ills—including growing concentration, rising prices, stagnant growth, and soaring inequality—resulting in calls for a revival of antitrust law.

Read more at Harvard Law School Forum on Corporate Governance