Political power and market power: evidence from consolidation

The concentration of industry increases the power of the market, but can it also increase the political power? This question, first asked by Brandes in 1914, is gaining new attention. This column examines the impact of consolidation on the amount of political activity of consolidation agencies. Although theoretical predictions are unclear, U.S. data from the past 20 years indicate that the average consolidation of listed companies is associated with a 30% increase in lobbying costs.

In recent years, there has been a growing concern that industry-centeredness directly affects consumers not only through market power (potentially high price increases and decreases in volume), but also indirectly through politics (Zingales 2017, Wu 2018). The ruling parties probably lobbied politicians to create barriers to entry and thus protect their market power. This is another form of consumer loss, and the channel through which it flows is control. If the lobbying scale demonstrates economics, then increasing market density will result in increased lobbying activity. If this assumption is correct, market power gives birth to political power.

Companies invest a lot of resources to influence policy. Businesses account for the lion’s share of lobbying costs. According to OpenSecrets, businesses accounted for about 87% of total lobbying spending in the United States in 2019. Also, spending on lobbying has increased over the last 20 years.

Which companies are more likely to be involved in lobbying? Rajan and Zingales (2003) point out that returns to impact activities are large for large responsible organizations. If these companies persuade the government to create barriers to entry, they can keep potential competitors at bay and maintain their monopoly rent. In 1914, Supreme Court Justice Louis Brandes was concerned about the “curse of old age” in the context of the railroad. Wu (2018) reconsiders these concerns: “The more centralized the industry, the more corrupt we can expect the political process to be.”

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

We first propose a theoretical setting to describe in a circular way the connection between the market and lobbying. Our view is based on Grossman and Helpman (1994) where companies, in a given industry, compete against each other and also make political contributions to influence government-chosen regulations. An attachment should therefore have two effects. One is the known increase in market power. The other is an indirect influence that works through political influence. If the first effect is present, the two companies together will enjoy more exclusive rent than the two companies separately. This will give the consolidated company more incentive to spend resources in a regulatory environment that protects their monopoly rent.

We are drawing a distinction between a policy that can benefit all stakeholders in an industry and a policy that directly benefits a particular firm (and indeed harms other existing competitors). An example of the former could be tariffs that exclude foreign companies. An example of the latter would be the provision of preferential treatment or targeted subsidies in public procurement.

Our model shows that when lobbying on a private component, firms apply a negative externality to each other. Excessive cost from one firm harms another firm. As such, lobbying in this context is excessive. Through consolidation, firms alleviate coordination problems, thus reducing the cost of balancing lobbying.

In contrast, while there is a universal good quality of control for those in charge, lobbying and concentration are strategic complements. A centralized industry destroys favorable policy through competition, and so there is limited incentive to lobby for more control. In contrast, a centralized industry is more motivated to advocate for an industry-friendly policy because it keeps more of the surplus it generates. Therefore, in this context consolidation increases lobbying costs.

To experimentally determine whether lobbying efforts tend to increase or decrease as a result of consolidation, we use data from SEC-registered companies over the last 20 years (using compostat). We focus on how political influence costs change before and after consolidation. Because integration is not random, we follow two empirical approaches, both based on the timing of the integration.

In both designs, our results positively suggest that the political influence in the United States is associated with an increase in the cost of firms in the activity. Added to the average consolidation is the amount spent on lobbying from $ 130K to $ 206K per year after the consolidation, or approximately 30% of the consolidation companies’ average per-time expenditure. The average consolidation is associated with an estimated AC 8K to $ 20K increase in campaign contributions (PACs) per year, but this resource is not statistically significant in all specifications.

We also test variations with firm size by differentiating between ‘small’ and ‘large’ firms (using revenue for size measurement). We find that the results are more noisy for smaller companies, although it is actually larger companies that increase their political influence as well as consolidation. Our results are visually summarized in Figure 1 (lobbing) and 2 (PAC cost).

Figure 1 The effect of consolidation on lobby spending

Figure 2 Impact of consolidation on PAC costs

Our inquiries do not discuss the benefits of different types of controls for consumers (such as safety or environmental factors), or integration may at times enhance efficiency. However, regulations can be used to create corporate barriers to access or otherwise protect the market power of incumbents. This will create another form of consumer loss, but one that comes through control channels rather than a common way of price, quantity and innovation.

For readers concerned about these effects, one possibility is to include in the guidelines for regulatory guidelines the link to considerations about direct lobbying power. Another implication is that distrust, lobbying regulations and campaign money control are complementary benefits for consumers. Properly planned and implemented, lobbying and campaign financing rules can limit firms’ influence over regulators and politicians and lead to regulation in favor of a more competitive market structure.


Brandes, LD (1914)Other people’s money: and how bankers use it, HeinOnline Legal Classic Library, FA Stokes.

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

Grossman, GM and E. Helpman (1994), “Safety for Sale”, American Economic Review 84 (4): 833–850.

Rajan, R. and L. Jingales (2003), Saving Capitalism from Capitalists: Unleashing the Power of the Financial Market to Create Wealth and Spread OpportunitiesPrinceton University Press.

U, T (2018), Curse of old age: disbelief in the new golden ageColumbia Global Reports, page 58.

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

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