Matteo Broso

I study a product differentiation model with endogenous entry where a politically connected public firm competes with a private one. Consumers are heterogenous in their willingness to pay. First, I argue that because of political ties, the public firm may mimic the preferences of the consumer with the median type. Then, I show that as privatization increases, the market outcome shifts from an inefficient public monopoly to a duopoly, where the public firm can even be more profitable than the private one, and welfare is higher. However, full privatization is not socially optimal as it implies excessive product differentiation.

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.