Market Competition and Political Influence: An Integrated Approach
GAICIL Insights
Economists study markets, political scientists study politics, and dominant firms operate in both at once.1 Market Competition and Political Influence: An Integrated Approach, by Steven Callander, Dana Foarta and Takuo Sugaya, refuses the academic division of labor. Political decisions set the rules of market competition, and market competitors participate in and influence political decisions. The model captures this circularity, treating market and political outcomes as jointly determined.
The central result is a bounded feedback loop. Market power begets political power, and political power begets market power. The loop has limits. With too much market power, the balance between politics and markets becomes lopsided, driving a wedge between the interests of the policymaker and the dominant firm. Such a wedge might seem to favor competition, yet the authors show it can exacerbate the static and dynamic inefficiency of market outcomes. Intuitions about competition can be upended when competition is intermediated by a strategic policymaker. A regulator at war with a giant may not be protecting anyone.
The deeper insight concerns politics itself. The value of political power varies with the market environment. For a fixed set of political tools, policymakers' command over the economy changes as market conditions change, altering business's impact on society. When markets and politics co-evolve, the interests of firms and the policymaker align, imperfectly, with ramifications in both domains. The policymaker cares about rents, firms care about market power, and outcomes reflect how these forces balance. A statute's real strength depends on the market it governs.
The authors list natural extensions. On the market side, the number of firms and the structure of competition. On the policy side, multiple policymakers and political competition. Hierarchical institutions, from legislator to regulator, would add an agency problem and raise the question of where firms lobby and transfer rents. Policymakers' motivations, including careers and policy itself alongside rents and consumer welfare, offer further scope.
Here is where the paper meets the present. Artificial intelligence is the obvious arena. Leading AI firms hold substantial market positions and engage actively with policymakers on regulation. The feedback loop suggests market and political power in AI may reinforce each other: firms with market power gain influence over rules, and favorable rules can entrench market power. Designing AI governance that serves the public interest requires understanding this loop. Every compliance regime written with incumbents in the room is a possible moat.
The bound adds nuance. Beyond a point, dominant firms' and policymakers' interests diverge. That divergence does not necessarily improve market outcomes and can worsen inefficiency. For AI, open conflict between regulators and dominant firms carries no automatic benefit; the design of the interaction matters. Headlines about governments confronting tech giants measure drama, with efficiency left unmeasured.
The extensions map onto AI governance closely. Multiple policymakers at national and international levels are developing AI rules. Competition among jurisdictions may affect how firms lobby and where they direct resources. Hierarchies from legislatures to specialized regulators shape where influence is exercised. A model with these features would give a richer picture of AI governance.
For policy, institutional design is the lever. Transparency in lobbying, clear rules on regulatory processes and competition among firms can limit the feedback loop. Open, competitive markets reduce the scope for any single firm to dominate both markets and politics. Policies keeping entry possible and markets contestable serve economic efficiency and political accountability together. Contestable markets are a form of democratic hygiene.
Competition analysis must therefore include politics. Market structure affects political influence, and political decisions shape market structure. Competition and regulatory policy should be considered together, especially in fast-moving sectors like AI.
Seen whole, the paper's message is plain: markets and politics must be studied jointly. Power in one domain spills into the other, with consequences for efficiency and welfare. As AI reshapes both the economy and the policy landscape, integrated thinking will be essential for sustaining competitive markets and accountable governance.
Here is the uncomfortable test for AI regulators: the most important measure may be keeping entry easy enough that no firm becomes powerful enough to write the rules. Once that point is passed, even a hostile regulator may make outcomes worse.
Introduction
The operation of markets and of politics are in practice deeply intertwined. Political decisions set the rules of the game for market competition and, conversely, market competitors participate in and influence political decisions. We develop an integrated model to capture the circularity between the two domains. We show that a positive feedback loop emerges such that market power begets political power, and political power begets market power, but that this feedback loop is bounded. With too much market power, the balance between politics and markets itself becomes lopsided and this drives a wedge between the interests of a policymaker and the dominant firm. Although such a wedge would seem pro-competitive, we show how it can exacerbate the static and dynamic inefficiency of market outcomes. More generally, our model demonstrates that intuitions about market competition can be upended when competition is intermediated by a strategic policymaker.
Takeaway
The focus of the political economy literature is on the choice of a policy, in which political power varies in the design of institutions and the identity of those who make the decisions. We have shown in this paper that the value of political power—the power of politics itself—varies as the market environment varies. For a fixed set of political tools, the command of policymakers over the economy and society changes as market conditions change. This, in turn, alters the impact of business on society. The core insight is that when markets and politics co-evolve, the interests of firms and the policymaker are aligned but not perfectly aligned. This has ramifications for the outcomes in both domains. We build a model to capture these incentives and characterize the outcomes they produce. The policymaker cares about rents and the firms care about market power, and the market and political outcomes reflect how these forces balance out. Many practical details are left out or included in a reduced form. Adding richness to the model will affect this balance and add nuance to the predictions, to be sure, but not fundamentally change the logic for how markets and politics interact. There are many natural ways to extend our model beyond those discussed in the previous section. On the market side, the number of firms and the structure of market competition are promising directions to explore.1
On the policy side, the natural extension is to multiple policymakers and instituting a degree of political competition. Political institutions are often structured hierarchically, from legislator down to regulator. Incorporating this into the model not only adds an agency problem, it opens up the question of where and not just how much firms lobby and transfer rents. The motivations of policymakers also offers scope to broaden the applicability of the underlying insights. In addition to rents and consumer welfare, policymakers care about their careers, about policy itself, or building bureaucratic empires. These motivations can generate the same incentive to ‘manage competition’ as emerges for a rent-seeking policymaker. For example, a regulator will be out of a job if she solves the underlying policy issue. To avoid rendering herself obsolete, a career-minded policymaker may ‘manage the policy issue’ in the same way that the self-interested policymaker here manages competition. A particularly intriguing extension is to explore a balance between political and economic goals. In our model, political power is the means to the end of market power. Some important political goals stand aside from economic outcomes, and market power may be the means toward those ends. Exploring the interdependence of politics and markets more deeply is of considerable importance.
Notes
- Steven Callander, Dana Foarta & Takuo Sugaya, Market Competition and Political Influence: An Integrated Approach, 90 Econometrica 2723 (2022), https://doi.org/10.3982/ecta19775. Takeaway source: Conclusion, reproduced from a free author or repository copy. ↩
Cite as: Steven Callander, Dana Foarta & Takuo Sugaya, Market Competition and Political Influence: An Integrated Approach, 90 Econometrica 2723 (2022), https://doi.org/10.3982/ecta19775
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