In new research, Luca Macedoni and Ariel Weinberger argue that large firms are more likely to lobby in favor of strict industry regulations when they can reduce competition by imposing high fixed costs on smaller, less-profitable firms.
When the United States Congress debated whether to give the Federal Drug Administration authority to regulate the manufacturing and marketing of tobacco in 2009, the fiercest opposition came from smaller cigarette makers like R.J. Reynolds and Lorillard. The loudest supporter was Philip Morris, maker of Marlboro and the tobacco industry’s dominant player. Moris’ support led critics to call the bill the “Marlboro Monopoly Act,” arguing that the new rules were a strategic boon to maintaining Marlboro’s industry dominance. The Family Smoking Prevention and Tobacco Control Act, which passed in 2009, imposed costly testing, reporting, and advertising restrictions that every cigarette company had to follow. Philip Morris, with its massive scale and entrenched brand, could absorb those costs far more easily than its upstart competitors selling discount brands like Bronco and Roger.
In new research, we argue that this pattern of industry leaders supporting strict regulation is systematic: across the U.S. economy, larger firms are significantly more likely to lobby in favor of tougher fixed-cost regulations compared with smaller firms. We analyzed over 20,000 firm-level lobbying reports that mention specific regulatory costs in their text—each corresponding to a single lobbying expenditure. The use of machine learning allows us to scale previous approaches. Our primary finding is that firm size consistently predicts support for stricter rules because most regulations impose costs that do not scale with the size of a company.
For example, compliance with federal advertising restrictions may cost Phillip Morris and its smaller competitor each about $500,000 to hire a team of lawyers that can handle the paperwork. Phillip Morris may require a slightly larger team as it does more advertising, but if Phillip Morris is five times larger than its competitor, its compliance team won’t be five times larger. However, a $500,000 compliance bill can bankrupt a company with $2 million in revenue, but is a rounding error for one earning $200 billion. When smaller competitors cannot keep up with regulatory demands and must exit the market, the surviving firms enjoy a less competitive environment.
How regulation becomes a competitive weapon
The key insight of our article is that regulations affect firms through two opposing mechanisms. The direct effect hurts everyone: compliance costs go up and profits shrink. But there is also an indirect effect: the least profitable firms cannot survive, so they shut down. The firms that survive now face less competition and capture a bigger share of demand. For large, profitable firms, the indirect benefit of less competition outweighs the direct cost of compliance. For small firms, the compliance costs dominate. The result is that firms within the same industry can have fundamentally different preferences about the same regulation.
When embedded within a standard “Protection for Sale” lobbying framework, which explains how lobbying groups make political contributions in order to increase trade protections and boost profits, our model derives testable predictions. Larger firms will lobby for tougher regulations when these primarily increase fixed production costs. If regulations only affect per-unit costs, for example an excise tax on cigarettes, firms of all sizes—including Phillip Morris—will resist them. Regulating environmental standards by requiring expensive monitoring, imposing food safety rules that demand dedicated testing labs, and creating intellectual property protections that require legal infrastructure—all primarily affect a firm’s fixed costs. These are the kinds of regulations where we expect to see the biggest gap between large and small firms’ lobbying positions.
Identifying firm stances through lobbying reports
We meticulously combed through lobbying reports to identify the subjective stance of what firms want. U.S. lobbying disclosures filed under the Lobbying Disclosure Act of 1995 describe what a company lobbied on, but they do not neatly label whether the firm supported or opposed a given rule. A report containing “Worked in support of GMO labeling legislation” clearly indicates a pro-regulation stance. In the other direction, there are reports that demonstrate a clear opposition given the context of the report. A report might state:
S.J.Res 26, a joint resolution disapproving a rule submitted by the Environmental Protection Agency relating to the endangerment finding and the cause or contribute findings for greenhouse gases under section 202(a) of the Clean Air Act – support.
The stance is more subtle because the text contains “support,” but backs a resolution against EPA involvement. Finally, a report might mention a keyword like “support” in describing the legislation itself, not the firm’s position. In fact, many lobbying reports are classified as “unknown.”
This measurement challenge has limited researchers in studying firms’ lobbying stances systematically, and the few studies that do look at firms’ stances focus on specific policy areas. To solve this, we trained a machine learning algorithm on a sample of reports we classified by hand, then used it to categorize the full dataset—achieving 86–87% accuracy. We validated the results extensively, including by hand-checking a separate sample, and found no evidence that the algorithm introduced any systematic bias.
How firm characteristics explain support for regulation
Matching firms’ lobbying stances with financial data on firm revenue, employment, and capital, we find a clear relationship between firm size and stance on regulation. Moving from a smaller to a larger firm—specifically, from the 25th to the 75th percentile of sales—is associated with a 12 percentage point increase in the likelihood of supporting restrictive regulation, holding capital constant. The pattern holds whether we measure size by revenue, employment, or market share. The relationship is also strongest in the industries where our mechanism should be most salient. The link between firm size and pro-regulatory lobbying intensifies in concentrated industries, such as beverage, tobacco, and apparel manufacturing, where knocking out a competitor has the biggest payoff. This is also strongest in sectors where compliance costs are primarily fixed rather than variable, like pharmaceuticals or toy manufacturing.
There are other reasons a large firm might support regulation, so we examine three alternative mechanisms. First, big incumbents may not just support rules but lobby on them in order to shape them to their advantage. It is also possible that supporting tough standards is a form of quality signaling—a way for established firms to advertise reliability. Finally, it could be a reputational play, similar to investing in a high environmental, social, and governance (ESG) score. We test each of these alternatives using firm-level data on lobbying expenditures, R&D intensity, and ESG ratings. While each factor is sometimes associated with greater support for regulation, none of them explains the core pattern: the relationship between firm size and pro-regulatory lobbying remains strong and unchanged once we account for them. The most consistent explanation remains the mechanism laid out in our theoretical framework: large firms benefit when uniform compliance costs thin out their competition.
Size alone does not determine a firm’s stance. We also find that conditional on size, capital-intensive firms—those with large physical investments, heavy debt, and assets that cannot easily be repurposed—tend to oppose regulation. An example would be a chemical plant with billions sunk into specialized equipment: if new rules require redesigning or retrofitting production facilities, compliance becomes more costly the more capital is already in place. In contrast, firms with more flexible operations and intangible assets, such as a technology firm whose most valuable asset is intellectual property, can adapt to a new regulatory environment and exploit the competitive shake-up it creates.
At the industry level, we find that increases in regulatory intensity are strongly associated with higher rates of business closure and this dynamic is driven entirely by the exit of small firms. More heavily regulated industries also tend to become more concentrated over time. These patterns do not prove that regulation causes small firms to exit the market, but they are consistent with the mechanism we describe.
Policy implications
The conventional assumption in regulatory debates is that business uniformly opposes regulation. Political support for stricter standards, in this view, comes from consumers, workers, or advocacy groups. Our findings challenge that assumption. When large firms strategically back regulations that burden their smaller rivals, the political coalition in favor of strict rules may be broader and may produce resulting standards that are tougher than what a government focused solely on consumer welfare would choose.
This dynamic extends to international agreements. While our results are consistent with warnings that deep integration may empower special interests, recent debates about regulatory harmonization in trade deals typically assume that corporate lobbying pushes for weaker standards. But if the firms with the most political influence actually prefer more costly rules, international cooperation could produce stricter regulation, particularly when governments are responsive to their largest firms.
Environmental, safety, and consumer protection standards serve vital purposes. Understanding who supports regulation, and why, is essential for designing policies that serve the public good rather than tilt the playing field toward incumbents.
Author Disclosure: Financial support from the Carlsberg Foundation is gratefully acknowledged. The authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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