Political Power and Market Power

Does market power lead to political power? This longstanding question, raised by Louis Brandeis in 1914, remains strikingly relevant today. As industries become more concentrated, firms not only shape markets but also seek to influence the regulatory and political landscape. In our study, Political Power and Market Power, we examine this connection using detailed data on U.S. mergers, lobbying expenditures, and campaign contributions over two decades. Our findings suggest that corporate consolidation is often followed by a significant and persistent increase in political influence activities, with implications for policy and governance.

 The Hypothesis: Market Power Begets Political Power

Mergers are widely understood to reshape markets, increasing firms’ pricing power and profit margins. However, this economic consolidation may have a less obvious but equally profound consequence: enhanced political influence. By lobbying policymakers and contributing to campaigns, firms can shape regulations to protect or amplify their market advantages. This dual channel of influence—market and regulatory—forms the crux of our analysis. 

We develop a theoretical model to formalize this idea. Our framework builds on models of industrial organization and political economy, integrating the insights of Grossman and Helpman (1994). In competitive industries, firms’ incentive to lobby on behalf of their industry may be suppressed. Although industry-level collective action problems have been discussed since Olson (1962), we introduce an additional, market-based reason: Rent dissipation.

In a competitive market, firms that succeed in lobbying are still in competition with one another. Any “rents” businesses get from lobbying could be competed away in competition over prices for their products. This lowers the incentive for lobbying. Collective action problems are common in many forms of political action, but the rent dissipation (via price competition) in our model is unique to businesses lobbying.

When industries consolidate, the merged entities can stop competing on prices. Thus they retain the benefits of lobbying, rather than competing them away, creating stronger incentives to invest in political influence. This is another form of consumer harm, but one that flows through the channel of regulation.

The result? A feedback loop where market power fuels political power, and political power reinforces market dominance. Consumers are harmed twice: Once through the traditional channel of prices, and the other through the channel of regulation. An empirical analysis that ignores the second harm underestimates the harm to consumers of concentration.

Key Findings: Lobbying Surges Post-Merger

Using a dataset of SEC-registered firms, we analyze how lobbying and campaign contributions evolve following mergers. Employing two complementary empirical approaches—a panel event study and a differential exposure design—we observe robust patterns:

1. Increased Lobbying Expenditures: On average, mergers are associated with a 15–35% increase in lobbying spending by the merging firms. For the typical merging firm, this translates to an annual increase of $70,000 to $180,000 in lobbying expenditures.
   
   
2. Persistent Political Engagement: Mergers influence the “extensive margin” of political activity. Firms that previously had little or no political presence are significantly more likely to establish in-house lobbying operations or form Political Action Committees (PACs) following a merger. Once these structures are in place, they tend to persist.
   
   
3. Heterogeneity Across Firms: The political effects of mergers are most pronounced among large firms and those operating in already concentrated industries. Horizontal mergers—those involving direct competitors—show particularly strong effects on lobbying activity, reflecting the shared incentives to influence policy.
   
   
4. Industry-Wide Impact: Beyond individual firms, mergers often trigger increased political activity by trade associations. These collective lobbying efforts further magnify the influence of concentrated industries on regulatory outcomes.

Implications for Policy and Governance

Our findings highlight a critical yet underexplored consequence of mergers: the amplification of political influence. This phenomenon raises important questions for policymakers and regulators. Should antitrust frameworks consider not only the direct economic impacts of mergers but also their implications for political power? How might lobbying and campaign finance regulations be refined to address the risks posed by concentrated industries?

Antitrust policy, lobbying rules, and campaign finance regulations are deeply interconnected. Addressing market concentration without acknowledging its political ramifications risks leaving a significant channel of influence unchecked. By contrast, a holistic approach that integrates these domains could promote more competitive markets and fairer regulatory processes. There may also be remedies outside of antitrust.

A Call for Further Research: The Non-Market Effects of Market Power

While the scope of our paper is limited to politics and regulation, we hope it exhibits a broader point. Once upon a time, economic thinking about concentration was limited to simple models of prices and quantities. The relationship between concentration and democracy, public discourse, or other non-market outcomes was regarded as resistant to rigorous definitions, measurement, and analysis.

Today’s research toolkit has significantly changed. High quality data is available about a broad number of topics at the intersection of markets and media, politics, regulation and other topics. The trend is strongly towards datasets continuing to grow. Similarly, economic theory and modeling have also advanced. The topic of political economy has significantly developed in the last twenty years. Problems once considered intractable have yielded.

This creates new opportunities for research. To encourage and circulate such research, for the last two years we have organized The Non-Market Effects of Market Power Conference at Columbia University. Our conference brings together scholars across disciplines studying the role of uncompetitive markets in shaping outcomes beyond markets. We expect to organize it again, and interested scholars can follow  http://non-market.org/ for our next announcement.

Conclusion

Our study underscores the importance of considering political power alongside market power when evaluating mergers. As firms consolidate, their ability to shape policy grows, with far-reaching consequences for competition, regulation, and democracy.

The political dimension of market power was the core concern of the founders of the antitrust movement that led to the Sherman Act. Modern antitrust practice rarely engages with this dimension, and instead focuses only on price increases arising after mergers. By shining a light on these dynamics, we hope to inform debates on corporate governance and better understand how mergers and concentrated industries affect consumers more broadly.