I study a product differentiation model with endogenous entry where a  politically connected public firm competes with a private one. Consumers are heterogeneous in their willingness to pay. I argue that -- because of political ties -- the public firm may mimic the preferences of the consumer with the median willingness to pay. I show that as privatization (i.e., the weight on profits in the public firm's objective function) increases, the equilibrium market structure shifts from a welfare-inefficient public monopoly to a duopoly. Under duopoly, the public firm can set a relatively low price in order to attract and please the median consumer. In this way, the public firm gains market shares and, consequently, market power. In equilibrium, the public firm can then end up being more profitable than its private, profit-seeking competitor. Finally, I show that full privatization is not socially optimal.

We study the impact of mergers on quid-pro-quo lobbying and elections in a political agency model. Two incumbent firms can lobby an incumbent politician to block a pro-competitive reform. The politician's type determines whether they are susceptible to the firms' influence or not. A representative voter tries to infer the politician's type monitoring the policy-making process. We show that lobbying increases when firms merge because rents from political protection are not dissipated by price competition. While greater market concentration may increase prices and political influence, it also improves voters’ ability to screen bad politicians by observing distorted policy outcomes. This generates a novel trade-off: mergers can harm consumers through market and political power, yet improve selection of politicians. We characterize when standard consumer welfare–based merger control is too lenient or too strict once these political economy effects are taken into account.

-- CEPR Discussion paper 

We study a dynamic model where a firm can grow in size by acquiring competitors and lobby office-seeking politicians. When the firm is distressed, the incumbent politician loses the office with some probability. Larger firms are less likely to experience distress but their distress has more severe political consequences. To prevent these, politicians can offer political support to the firm. We show that, in equilibrium: (i) the level of political support is non-monotone in the firm's size; (ii) the firm can complete acquisitions just to extract political support; and (iii) the number of these "Political Acquisitions'' is non-monotone in the strength of politicians' re-election incentives.