Mergers, Lobbying, and Elections: Is there a "Curse of Bigness"?

Abstract

We study the impact of market concentration on elections and lobbying in a political agency model with adverse selection and moral hazard. Two incumbent firms can lobby a politician (P) to prevent a pro-competitive reform. P's type determines whether they care about bribes or not. A representative voter tries to infer P's type monitoring the policymaking process. We investigate the welfare implications of a merger between the two firms. In equilibrium, the merger increases firms' incentives to lobby and their ability to influence politics. This additional political power reduces the chances that the pro-competitive reform is approved, hurting consumers; but it allows the voter to defeat a corruptible P with higher probability. Thus, it improves the voter's screening and mitigates adverse selection. We discuss how this new trade-off interacts with traditional competition considerations in the merger's assessment.

Keywords: Lobbying, Political Agency, Mergers and Acquisitions, Antitrust JEL Classification P16, L41, D72, G34

JEL Classification: P16, L41, D72, G34