Political Activism and Market Power

Abstract

Politically active firms increase market power during times when their information advantage and influence is greater: during times of heightened policy uncertainty. The effect is especially pronounced among large politically active firms, and it is long-lasting and economically sizable. We also identify strategically timed large investments as one plausible mechanism whereby politically active firms enjoy abnormal profits. We overcome the nonrandom nature of political activism using instrumental variables and an experiment surrounding the enactment of legislation lobbied by sample firms. Our results suggest that political activism is a likely contributing factor to declines in competition over the last two decades.

Keywords: Market Power, Political Activism, Policy Uncertainty, Competition, Profitability, Profit Margins, Market Share, Capital Investment

JEL Classification: D72, G31, G38, P16