Do political factors affect the degree of product market competition?
To explore this hypothesis we first look at the international variability in PPP-adjusted retail prices. We find a greater variability of international prices in regulated sectors (where the political influence is greater) and lower prices in more democratic countries. To probe deeper we focus on the mobile telecommunication sector. After controlling for differences in market size, we find that the degree of competition is higher in more democratic countries, especially in Scandinavian ones, and lower when the incumbent phone operators have more political connections. We also find some direct evidence of how political power affects the degree of competition through spectrum auctions and antitrust enforcement (or lack thereof).
Not surprisingly, in the mobile sector more competition leads to lower prices. Yet, there is no evidence that it leads to lower quality or less investments, if anything it is the other way around. Finally, we estimate the potential welfare transfer of reduced competition. U.S. consumers would gain $72bn a year if U.S. prices were in line with Danish ones and $32bn if they were in line with German ones.
Robert C. McCormack Professor Entrepreneurship & Finance
Neubauer Family Professor of Entrepreneurship and Finance
Toulouse School of Economics