Satellite Sisters.

When the satellite-radio companies XM and Sirius announced, last month, that they were planning to merge, it looked like a futile attempt to flout antitrust regulations. The merger would benefit Sirius and XM--which, despite signing high-profile figures like Howard Stern and Bob Dylan, have cumulatively lost close to seven billion dollars--but it would confront radio listeners with a satellite-radio monopoly. Not surprisingly, then, when Sirius's C.E.O., Mel Karmazin, appeared before Congress to defend his plans, he was grilled by legislators convinced that regulators would block the merger. The deal, though, is far from dead. Thanks to an intellectual revolution that, over the past three decades, has transformed the way the government assesses mergers and monopolies, we may yet end up with only one satellite-radio provider in America. And, surprisingly, we may be all the better for it.

Antitrust law in the U.S. rests on two documents--the 1890 Sherman Antitrust Act and the 1914 Clayton Act. Their underlying principles are clear (competition and lower prices are good, collusion and price-fixing bad), but the laws themselves are remarkably vague, and regulators have had much leeway in enforcing them. In the era after the Second World War, for instance, the government took an aggressive stand against mergers. In 1962, it blocked a deal between the third-largest shoe company in the country and the eighth-largest, even though the new company would have owned just five per cent of the shoe market. A few years later, it barred two California supermarkets from merging, despite the fact that together they controlled less than ten per cent of the market and had many competitors. Bigness, regulators seemed to assume, was always bad.

The idea that if mergers were bad for competition they were bad for the economy was intuitively appealing. But it wasn't always accurate, as a group of law professors and economists, usually called the Chicago School, set out to show in the nineteen-seventies. Much antitrust regulation, they argued, did not benefit the economy but just protected small businesses; it could even make consumers worse off. (Most obviously, economies of scale allow bigger companies to produce more for less, which can lead to lower prices.) This meant that regulators should scrutinize deals through a different lens: if a merger reduced competition but enhanced "consumer welfare," it should be approved. Later economists have complicated these arguments--there's now a post-Chicago School--but the idea that mergers should be measured by their impact on "consumer welfare" remains central to antitrust law.

Even by these standards, though, the XM-Sirius deal looks sketchy, since monopolies created by merger are usually bad for consumers. So why does the deal have any chance at all? It comes down to the question of what market XM and Sirius are in. If it's just satellite radio, then they are competing only with each other and the deal ...