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Political power and market power: Evidence from mergers

Industry concentration leads to increased market power, but can it also lead to increased political power? This question, first asked by Brandeis in 1914, is receiving renewed attention. This column investigates the effect of a merger on the amount of political activity of the merging firms. While theoretical predictions are ambiguous, US data from the past 20 years indicate that the average merger involving listed companies is associated with a 30% increase in lobbying spending. 

In recent years, there has been rising concern that industrial concentration not only directly affects consumers through market power (potentially raising higher prices and reducing quantities), but also indirectly through politics (Zingales 2017, Wu 2018). Incumbent firms lobby politicians perhaps to erect barriers to entry and thus protect their market power. This is another form of consumer harm, and the channel through which it flows is regulation. If lobbying exhibits economies of scale, an increase in market concentration should lead to an increase in lobbying activity. If this hypothesis is correct, market power begets political power.

Firms invest a lot of resources to affect policy. Businesses are responsible for the lion’s share of lobbying spend. According to data from OpenSecrets, business accounted for almost 87% of total lobbying spending in the US in 2019. Also, spending on lobbying has grown over time in aggregate in the past 20 years.

Which firms are more likely to engage in lobbying? Rajan and Zingales (2003) point out that the return to influence activities is large for big incumbent firms. If these firms persuade the government to erect barriers to entry, they can keep out potential challengers and maintain their monopoly rents. In 1914, Supreme Court Justice Louis Brandeis worried about the “curse of bigness” in the context of railroad monopoly. Wu (2018) revisited these concerns: “The more concentrated the industry, the more corrupted we can expect the political process to be.”

Our recent paper (Cowgill et al. 2022) studies the link between lobbying and concentration, both theoretically and empirically.

We first propose a theoretical setting to describe the circularity of the connection between markets and lobbying. Our approach is based on Grossman and Helpman (1994) where firms, in a given industry, compete against each other and also make political contributions in order to influence a government’s choice of regulations. A merger should therefore have two effects. One is the familiar increase in market power. The other is an indirect effect that operates through political influence. If the first effect is present, the two firms together will enjoy greater monopoly rents than the two firms separately. That will give the merged firm greater incentives to spend resources on a regulatory environment that protects their monopoly rent.

We draw a distinction between policy that can benefit all the incumbents in an industry, and policy that benefits a specific firm directly (and may actually damage other existing competitors). An example of the former could be tariffs that keep out foreign firms. An example of the latter could be preferential treatment in public procurement or a targeted subsidy provision.

Our model shows that when lobbying over a private component, firms exert a negative externality onto each other. More spending from a firm hurts the other firms. As such, lobbying in these contexts tends to be overprovided. By merging, the firms ameliorate the coordination problem, thus reducing lobbying expenditure in equilibrium.

By contrast, when regulation has a public good quality for incumbents, lobbying and concentration are strategic complements. An unconcentrated industry tends to dissipate favourable policy through competition, and therefore has limited incentive to lobby for more regulation. On the contrary, a concentrated industry is more motivated to lobby for industry-friendly policy as it retains more of the surplus generated by it. Therefore, a merger in this context tends to increase lobbying expenditure.

To determine empirically whether mergers tend to increase or decrease lobbying efforts, we use data from SEC-registered companies over the past 20 years (using Compustat). We focus on how political influence spending varies before and after a merger. Because mergers are not random, we pursue two empirical approaches, both based on the timing of mergers.

In both designs, our results suggest that mergers are positively associated with an increase in firms’ spending on political influence activities in the US. The average merger is associated with a $130K to $206K increase in the amount spent on lobbying per year after the merger, or approximate 30% of average per-period spend of merging firms. The average merger is also associated with approximately an $8K to $20K increase in campaign contributions (PACs) per year, but this association is not statistically significant in all specifications.

We also examine heterogeneity along firm size, distinguishing between ‘small’ and ‘large’ firms (using revenue to measure size). We find that results are noisier for small firms, while it is indeed the larger firms that increase their political influence activity along with mergers. Our results are visually summarized in Figures 1 (lobbying) and 2 (PAC spending).

Figure 1 Effects of mergers on lobby spending


Figure 2 Effects of mergers on PAC spending


Our findings do not dispute the benefits of many forms of regulation to consumers (e.g. safety or environmental reasons), or that mergers can sometime increase efficiencies. However, corporate control of regulations could be used to erect barriers to entry or otherwise protect incumbents’ market power. This would constitute another form of consumer harm, but one arriving through the channel of regulation rather than the typical avenues of price, quantity, and innovation.

For readers concerned about these effects, one possibility is for regulatory guidelines to directly incorporate considerations about lobbying power into merger guidelines. Another implication is that antitrust, lobbying regulations and campaign finance regulation are complementary benefits to consumers. If correctly designed and enforced, regulations of lobbying and campaign finance could limit influence of firms on regulators and politicians and lead to regulations favouring more competitive market structures. 


Brandeis, L D (1914), Other people’s money: And how the bankers use it, HeinOnline legal classics library, F A Stokes.

Cowgill, B, A Prat, and T Valletti (2022), “Political power and market power”, CEPR Discussion Paper 17178.

Grossman, G M and E Helpman (1994), “Protection for sale”, The American Economic Review 84(4): 833–850.

Rajan, R and L Zingales (2003), Saving capitalism from the capitalists: Unleashing the power of financial markets to create wealth and spread opportunity, Princeton University Press.

Wu, T (2018), The curse of bigness: Antitrust in the new gilded age, Columbia Global Reports, pp. 58.

Zingales, L (2017), “Towards a political theory of the firm”, Journal of Economic Perspectives 31(3): 113–30.

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