(FORTUNE Magazine) – Software brings out the worst in government trustbusters. The latest example: The Department of Justice sued Oracle in late February to prevent it from acquiring PeopleSoft, even though many industry experts see no problem with such a combination. What the feds seem to miss is that this brutally competitive market works on its own to restrain excesses. Since software is really nothing more than ideas expressed in computer code, new products can get into the running more quickly than in industries based on physical goods.

You'd think the government would have learned from the Clinton-era Microsoft case, in which the DOJ struggled for years to nail the company for monopolistic infractions. The DOJ eventually won a toothless settlement. But since then, technological progress has punished Microsoft in a way the government never could. Open-source software, collectively produced by a global community of programmers and users and distributed free or at minimal cost, is cutting in on Microsoft's market. Many customers don't like the company's high prices, and they're going open source.

So why is the DOJ trying to stop the Oracle/PeopleSoft deal? A quick refresher: Oracle has offered $26 per share, or $9.4 billion, in a hostile attempt to take over PeopleSoft, which is a big player in enterprise applications, a market in which Oracle is desperate to excel. Enterprise applications automate corporate functions like finance, marketing, HR, and so forth. PeopleSoft CEO Craig Conway is resisting the bid and has encouraged the government to block it. In their legal complaint, the feds claim that big corporate customers of this kind of software have only three suppliers to choose from--SAP, PeopleSoft, and Oracle. Reducing that number to two would "eliminate or substantially lessen" competition, raise prices, and reduce industry innovation, the DOJ alleges.

There are several good reasons the government is wrong. For one thing, the DOJ's assertions notwithstanding, there are actually a lot of other suppliers in this market. Further, if any of the DOJ's worst-case scenarios came to pass, angry customers would efficiently stimulate new competition. "The DOJ should look at how little it really takes to create software," says Jim Goodnight, CEO of SAS, a big provider of analytic tools that work in conjunction with the software of the three major enterprise-applications companies. "You buy a PC, and you write it." A top technologist at one of the world's largest corporations adds, "It's software--anybody who comes up with a better product has a virtually equal chance to succeed."

There are many places from which innovation could spring. Like Microsoft, for instance. Though it only recently got into enterprise applications, and just for small companies, Microsoft's annual sales of such software are already about 20% larger than PeopleSoft's. Other possible future forces in this market: Siebel Systems, the dominant player in sales and marketing software; a new group of companies, led by Salesforce.com, that sell software as a pay-by-the-month service; and of course the good old open-source community, already moving into enterprise applications.

It's instructive to think about why Oracle wants PeopleSoft. Customers got fed up with the power that Oracle wielded in databases and began finding ways to avoid paying Oracle's high prices. Oracle wants to replace the lost growth by stepping up its efforts in enterprise applications. What all this shows is that the market serves customers, and serves them well. Too bad even a Republican-run DOJ can't seem to understand that.