Political Connections and Market Structure

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This paper empirically investigates how political connections affect market structure and quantifies the welfare cost of political influence. We focus on a specific industry, grocery retail in Italy, where the largest firm is a network of consumer cooperatives that has historical links to political parties. We estimate a game-theoretic model that accounts for the interdependence among firms’ entry decisions and for the effect of political connections, allowing for connections to influence both firms’ payoffs from entry and their information sets. In a counterfactual, we examine the effects of removing political connections. We find that consumers suffer substantially in markets where connections act mainly as barriers to entry of competitors of the connected firm, but can also stand to gain from connections where links with local politicians help the connected firm to overcome the burden of entry regulation.