Essays on Competition Policy

The aim of competition policy is to balance market power so as to protect and improve consumer welfare. In this thesis I study how antitrust policy affects firms market power, and in turn how this power influences other important economic outcomes, ranging from innovation to redistribution and inequality. I study how antitrust authorities encourage innovation of merging firms by fostering competition. A change in merger notification rules allows me to build an event study comparing mergers notified to the authorities with non-notified ones. I develop a new text analysis methodology to identify mergers between close competitors, even for small private firms. As a result of the event study, non-notified horizontal mergers lead to 30% less innovation effort, measured as patenting activity. To understand the mechanism driving these findings, I build a model with endogenous merger choice where optimal antitrust policy deters anticompetitive mergers, which are also most detrimental to innovation. An increase in the number of non-notified anticompetitive mergers is consistent with the deterrence effect of antitrust authorities. Changes in antitrust policy provide unique instances of variation in market structures, which allow to study how market power affects surplus distribution. In the second chapter I analyze the effect of amendments on merger regulation in several countries, showing that such changes in antitrust policy resulted in stealth consolidation, increasing the number of potentially anticompetitive transactions. Furthermore, I show that such policy changes increased industry level concentration, decreased investment, decreased labor shares in affected industries, and consequently increased income inequality in affected countries. In the third chapter I answer a similar research question, but from a macroeconomic perspective. I use stealth consolidation in a dynamic factor model to identify exogenous variations in market power and their effect on the economy, a novel methodology that allows to overcome limitations in the data. Results show that the identified market power shock lowers output, but it increases the share of output that goes into profits. Moreover, it increases income and labor earnings inequality on impact, and this is mainly due to an earnings loss for the poor. The identified shock accounted for an increase in income Gini index by 0.4 between 2001 and 2006, and it can account for 20\% of the variation in inequality. Therefore, this chapter provides evidence of a causal link between market power and income inequality.