Problem
When regulators decide whether to allow a merger, they ask one question: will this make the market more or less competitive? To answer it, they look at prices, market share and consumer choice. Big companies spend money trying to shape the rules that govern them. They lobby governments, fund political campaigns and push for regulations that keep rivals out. If a merger makes a company bigger, it may also make it politically louder. And that is a cost that antitrust authorities rarely measure.
Science
We built a theoretical model of why mergers increase lobbying, then tested this prediction against nearly two decades of real data. When two competing firms merge, they no longer compete away the gains from influencing regulation, so lobbying becomes more profitable. This is exactly what we find in the data. Using records on more than 15,000 companies registered with the US Securities and Exchange Commission (SEC) from 1999 to 2017, we tracked their mergers, their federal lobbying spend and their campaign contributions through political action committees (PACs), the vehicles US companies use to donate to political campaigns.
Political influence is not always bad news, however. In a companion paper, we build a model in which voters try to detect corrupt politicians by watching how they regulate industries. A politician who blocks a pro-consumer reform in exchange for lobbying money reveals themselves as corruptible — so, paradoxically, more lobbying after a merger can sometimes help voters identify and remove bad politicians. This creates a genuine trade-off for merger policy, not just a cost to be added up.
Outcome
The data confirm the model. The average merger is associated with a $75,000 to $190,000 increase in lobbying spend per half year, equivalent to a rise of 21 to 53 per cent of what merging firms spent before the deal. Mergers also push companies into political activity for the first time: a merger makes a firm 1.4 percentage points more likely to set up an in-house lobbying team and 1.7 percentage points more likely to create a corporate PAC. Once established, these operations persist. Companies with in-house lobbying teams are active in 95 per cent of subsequent half-year periods. The effects are strongest when the merging firms are large and operate in the same industry.
Change
Antitrust authorities in the US and around the world assess mergers on market power alone. Our research shows that a merger that looks acceptable on price and competition grounds may still cause harm by giving the merged company greater ability to shape the regulations that govern it. Taken together, our findings support a return to stronger, rebuttable structural presumptions in merger control — treating sufficiently large mergers as presumptively harmful unless firms can prove otherwise, an approach unfortunately competition authorities in the US and Europe have moved away from in recent decades.
Bo Cowgill, Columbia University; Andrea Prat, Columbia University; Tommaso Valletti, ³Ô¹ÏºÚÁÏ; Matteo Broso, University of Padua
'Political power and market power', American Economic Journal: Economic Policy (forthcoming); 'Mergers, lobbying, and elections: is there a "curse of bigness"?', Journal of Law, Economics, and Organization (forthcoming)