The elusive theory of political markets

As previously mentioned, at least two different streams have made use of the notion of ‘political markets’ as a core concept in their theoretical framework: the Downsian and the Schumpeterian traditions. In the Downsian tradition, actors strive to match their ‘product’ to exogenous electoral preferences in order to obtain ex ante authorisation for the execution of a specific set of public policies. Followers of the Schumpeterian tradition, by contrast, emphasise ex post accountability as, according to their view, voters lack well‐defined preferences that could serve as the basis for ex ante accountability. In this context, the policy agenda, as well as public policies, are set by incumbent parties (Wohlgemuth Reference Wohlgemuth, Marciano and Josselin2005: 24–25).

Theories of the political market may also be distinguished based on the level of political competition on which they focus. The competition for government authority – generally involving only a handful of oligopolistic actors, see Downs (Reference Downs1957: 137) – is positioned at the highest level. Despite the dominance of the Downsian framework, a similarly compelling analogy has been put forth by Tullock and his peers. This describes the top‐level competition in question as a bidding process for the ‘natural monopoly’ of government (Tullock Reference Tullock1965; Wohlgemuth Reference Wohlgemuth2000: 274). Applied to parliamentary systems, this logic derives legislative and, therefore, executive power from the Weberian monopoly on violence. Taking a cue from microeconomics, elections are defined here as auctions dispersed over time that allow for the markets to ‘clear’ (Wohlgemuth Reference Wohlgemuth2000: 277).

The concept of political markets has not been at the forefront of the scholarly debates surrounding the development of party and electoral systems. It is revealing that a recent monograph on electoral reform (i.e., Renwick Reference Renwick2010) does not include a reference to the notion of political markets. The same holds true for studies explicitly focusing on the party systems of Central and Eastern Europe (CEE), even as they consider elements of electoral reform that are very much compatible with the political markets approach.

This is not to say that the relationship of parties and their regulators in post‐communist party systems has not attracted any recent scholarly attention. Kopecký (Reference Kopecký2006) highlighted the symbiosis between political parties and the state in CEE, pointing out a strong state involvement in internal party affairs and party financing. Grzymała‐Busse (Reference Grzymała‐Busse2007) investigated the way parties both reconstructed and exploited the state in a post‐communist setting. A number of works focused on party funding, emphasising the strong role of the state in the region (e.g., Van Biezen & Kopecký Reference Biezen and Kopecký2001, Reference Biezen and Kopecký2007; Smilov & Toplak Reference Smilov and Toplak2007; Roper & Ikstens Reference Roper and Ikstens2008). The conclusions of these studies are not always congruent: while Van Biezen and Kopecký (Reference Biezen and Kopecký2001: 401) argue that the ‘predominance of state money may act to freeze the status quo of the party system’, Roper (Reference Roper, Roper and Ikstens2008: 2) claims that ‘public finance does not have a determinative effect on party competition’. Finally, Casal Bértoa and Van Biezen (Reference Casal Bértoa and Biezen2014) note that party regulation has had an uneven impact on party system development in the post‐communist part of Europe.

Our contribution is in direct conversation with this line of research in that it investigates the impact of the changes of the regulatory framework – understood here as electoral reforms and reforms of public funding – on party competition. The general theme of the ‘modifying effects’ (Clark & Golder Reference Clark and Golder2006) of the electoral system on the ‘number of parties’ (see, e.g., Moser Reference Moser1999; Lago & Martinez Reference Lago and Martínez2007; Reuchamps et al. Reference Reuchamps, Onclin, Caluwaerts and Baudewyns2014) also crops up from time to time in the literature. Yet only few studies go so far as to directly reference strategic entry and the costs of entry (Tavits Reference Tavits2006, Reference Tavits2008) or to mention the role of barriers to entry in this context (Doron & Maor Reference Doron and Maor1991; Van Biezen & Rashkova Reference Biezen and Rashkova2014).

More recently, Núñez and Jacobs (Reference Núñez and Jacobs2016) mapped the circumstances which influence the likelihood of electoral reforms. The authors made an attempt to gauge the effect of various barriers that may hinder the change of electoral institutions in Western Europe. However, the presumed link between electoral reforms and the party market structure was beyond the scope of their research. In a similar study analysing the electoral reforms of eight post‐communist states in the first decade after the transition, Birch et al. (Reference Birch, Millard, Popescu and Williams2002: 187) pointed out that ‘the learning process both enabled them to engage in increasingly strategic behavior and at the same time it widened the range of design elements that were seriously considered’. Furthermore, ‘over time there was an increase in barriers to entry for newcomers and advantages to existing political actors which worked to entrench their positions’ (Birch et al. Reference Birch, Millard, Popescu and Williams2002: 180).

The results of Chytilek and Šedo's (Reference Chytilek and Šedo2007) study are in line with the findings of Birch et al. (Reference Birch, Millard, Popescu and Williams2002): using a sample of 40 electoral events in 15 post‐communist countries, they concluded that the electoral reforms carried out in the post‐transition period favoured larger and more established parties. In contrast, Bielasiak and Hulsey (Reference Bielasiak and Hulsey2013), investigating a more extensive set of post‐communist party systems on a broader time scale, claimed that with respect to major reforms in election formula and district magnitude, electoral rules have become more permissive.

While these articles provide some insights with regard to the potential of the empirical application of a coherent theory of political markets, they refrain from directly applying the market analogy, as a paradigm, and the corresponding instruments of market structure analysis, such as market concentration measures. They are rarely built on an explicit theory of political markets and are not directly aimed at the relationship between the electoral system, understood here as the rules for market access, and party system change, understood here as market structure change. Therefore, in this article we examine not only individual concepts, such as the costs of entry, but political market structure in general, which is a novel approach in the literature.

Downsian perspectives

Public choice literature offers some useful clues for formulating a coherent theory of political markets (in plural). Authors aligned with this paradigm mostly examined the highest level of political competition, one that is populated by parties and candidates vying for executive power. The studies in question often build on the models of Hotelling, Downs and Duncan Black (Enelow & Hinich Reference Enelow and Hinich1984; Merrill & Grofman Reference Merrill and Grofman1999; Adams et al. Reference Adams, Merill and Grofman2005). In more recent party systems research, the topic was mainly discussed as a ‘competition for government’, including features such as being ‘open to all parties or closed’ (Mair Reference Mair, Katz and Crotty2006: 68; Wolinetz Reference Wolinetz, Katz and Crotty2006: 52–53, though the latter also claims that using the notion of ‘open or closed’ in systems research has a potential that ‘has not yet been explored’).

The middle level of political competition for seats and groups in the legislature is also extensively theorised in the literature. It is either treated as an arena for office‐seeking and policy‐seeking parties as opposed to vote‐seeking parties (Strøm Reference Strøm1990; Wolinetz Reference Wolinetz, Gunther, Montero and Linz2002: 150), or ‘New Politics’, niche and single‐issue parties (for the former, see Poguntke Reference Poguntke, Katz and Crotty2006: 401; Meguid Reference Meguid2005; for the latter, see Meyer & Miller Reference Meyer and Miller2015; Taggart Reference Taggart1998; Mudde Reference Mudde1999). In contrast, the lowest level of political competition, one that is not aimed at government power or parliamentary seats, is theorised as the domain of grassroots movements, civil society and interest groups, and the external relations of the party system with these entities (Poguntke Reference Poguntke, Katz and Crotty2006) − very much apart from any notion of a political market.

Finally, the interaction between the various levels of political competition is rarely addressed directly in a political market framework – some studies on redistricting/gerrymandering (e.g., Handley & Grofman Reference Handley and Grofman2008) and, especially for American scholars, issues of voter registration (Highton Reference Highton2004: 510) notwithstanding.

One major take‐away from this brief discussion of the literature is that a full‐fledged model of the structure of political markets is still elusive. On the other hand, the so‐called ‘unified theories’ (Merrill & Grofman Reference Merrill and Grofman1999; Adams et al. Reference Adams, Merill and Grofman2005) compress all aspects of political markets into a spatial ‘model of party competition’ based on vote‐maximising parties. While they allow for ‘a full range of possible political market conditions’ (Bergman & DeSouza Reference Bergman and DeSouza2012: 6), they in fact exclude the possibility of numerous and mutually interacting political markets.

Schumpeterian perspectives

It is important to note that some authors associated with public choice in fact move beyond interpreting politics through the single‐market analogy. Following Chadwick (Reference Chadwick1859), they talk explicitly about the competition in the market (or in/within the field) and for the market (Demsetz Reference Demsetz1968: 57; Galeotti Reference Galeotti, Breton, Galeotti, Salmon and Wintrobe1991). These interrelated concepts effectively correspond to the notions of the market for parties and of the market for government. If we break the concept of ‘competition for the market’ down further, we end up with a three‐level political pyramid as presented in Table 1.

Table 1.

Features of political markets

At the base of the pyramid, we find the market for political participation. This is a competition for ‘political attention’ and support. Unlike the periodicity of the market for government, contest in this market is continuous. The market for parties, at the middle level of the pyramid, creates a connection between the market for government and the market for participation. Successful players may enter at the lowest level, as was the case with green grassroots organisations evolving into full‐fledged political parties in various European countries, and over time they may even compete in the market for government. Players in the market for parties contend for parliamentary seats and the concomitant resources. Their success is evaluated based on criteria that are independent of a position in government, as is the case with most single‐issue parties.

The second major theme that deserves a more detailed discussion relates to the structure of each of these markets. The introduction of the idea of democracy as a natural monopoly by Tullock (Reference Tullock1965: 458) opened up the question of the market structure of political markets. Wohlgemuth (Reference Wohlgemuth2000: 281) writes about entry barriers to the ‘participation in the auction’, and an almost automatic logical conclusion from this is the recognition that the market for parties is not another market's ‘anteroom’, but rather a standalone market with its own structure. Schleicher (Reference Schleicher2006) refers to this insight explicitly when he talks about the ‘pre‐election market’ as a ‘downstream market’ compared to the election market.

If we accept the conceptualisation of the three interrelated markets as a model of representative democracy, we also have to acknowledge the possibility of a dense web of strategic interactions of the stakeholders in these markets. This leads to our third theoretical pillar: entry deterrence as a political strategy. Entry deterrence has, in fact, been occasionally modeled in sequential games as a tool for limiting competition (Mulligan & Tsui Reference Mulligan and Tsui2008: 3). Issacharoff and Pildes (Reference Issacharoff and Pildes1998) analysed the duopoly collision of Democrats and Republicans in the United States in passing laws that limit the entry of third‐party candidates into political markets. But this is not the whole picture. Entry barriers play different roles in different markets: low entry barriers may be beneficial for the incumbent in one market and detrimental to the incumbent in the other. In order to fully understand strategic behaviour in political markets, we have to depict each of these markets in line with their own logic and characteristic market structure.

The theory of industrial organisation and entry barriers

Rather than submerging all aspects of political markets into an overly complex hybrid model, an alternative strategy would unpack them into different political markets. Political scientists could borrow concepts from industrial organisation theory (Tirole Reference Tirole1988; Cabral Reference Cabral2000) for such an exercise. A good example of this approach is provided by Crain (Reference Crain1977: 829), who defines the ‘political market’ as a marketplace for buyers and sellers of ‘public‐policy outcomes’. This theoretical framework emphatically stresses the relevance of the ‘institutional structure’ of this market, as well as the potential restrictions on market entry. These barriers to entry are often treated as a means of rent‐seeking (Mueller Reference Mueller2003: 335–337), such as in the case of interest group lobbying (Anderson Reference Anderson1980). Soft barriers such as brand names and advertising are also considered in this context (Netter Reference Netter1983; Lott Reference Lott1986). Nevertheless, a complete categorisation of entry barriers in political markets remains an unfinished exercise. Fortunately, microeconomics offers useful analogies with its widely discussed typologies of economic entry barriers (Bain Reference Bain1954; Demsetz Reference Demsetz1982; Shepherd & Shepherd Reference Shepherd and Shepherd2003: 74–75; for a comprehensive review, see Table 1 in Lutz et al. Reference Lutz, Kemp and Dijkstra2010).

The first important distinction is between exogenous and endogenous entry barriers. The former ‘are embedded in the underlying conditions of the market’, while the latter refer to actions ‘within the dominant firm's own discretion’ (Shepherd & Shepherd Reference Shepherd and Shepherd2003: 191–195). This distinction, however, obscures the difference between strategic actions commonly referred to as ‘endogenous’, such as predatory pricing, and those aimed at changing the ‘underlying conditions of the market’ (Shepherd & Shepherd Reference Shepherd and Shepherd2003: 191).

While these distinctions are crucial for any analysis of political entry barriers, a more nuanced classification is needed in order to account for their unique nature. With his three‐tier classification, Wohlgemuth (Reference Wohlgemuth1999: 182) offers a good example for such a framework applied to political markets (see Table 2).

Table 2.

Entry barriers on the market for parties

Source: Adapted from Wohlgemuth (Reference Wohlgemuth1999: 182; Reference Wohlgemuth2000: 280–281).

Constitutional regulations are a principal reason for the absence of perfect competition in political markets. Limitations to ballot access are just one form of aligning electoral choices with the interests of rationally ignorant voters. An important restriction of this kind is related to party lists: actors with geographically uneven support may be disadvantaged. Similarly, the precise rules for recommendation slips (e.g., recommendations limited to a single candidate as opposed to multiple candidates) may cause entry barriers to vary significantly.

Innocent barriers are the direct products of the ‘underlying market conditions’ for parties and are thus unrelated to the strategic actions of the actors involved. Investments in propping up market share, such as advertising purchases, may be independent of legal regulations but still pose challenges to new actors. Incumbency also brings advantages, including name recognition or databases from previous campaigns.

Finally, strategic barriers arise from the actions of actors attempting to shape the political landscape. These strategic barriers include schemes of deterrence (e.g. negative campaigns), or the political analogies of predatory pricing. The latter refers to incumbents incurring a loss in exchange for driving competitors out of the market. Tinkering with electoral rules often produces such outcomes. It is also important to note that these are not mutually exclusive categories, as various types of behaviour may spill over into other areas: new strategic choices emerging in the wake of electoral reforms are just one example of this effect.

A comparative analysis of four CEE cases

Figure 1 shows the time‐series of value changes in the country‐specific Herfindahl indices; since we do not posit any causal relationship between country‐level trends in the region, for the sake of simplicity the X axis shows the rank order of the respective elections in each country. Table 4 provides values for the Herfindahl indices of vote shares in each examined country.

Figure 1.

Time‐series of value changes in the country‐specific Herfindahl indices.

Note: The X axis denotes the rank order of elections between 1990 and 2016 in each country. The conversions are as follows: Czechia: I: 1992, II: 1996, III: 1998, IV: 2002, V: 2006, VI: 2010, VII: 2013. Hungary: I: 1990, II: 1994, III: 1998, IV: 2002, V: 2006, VI: 2010, VII: 2014. Poland: I: 1991, II: 1993, III: 1997, IV: 2001, V. 2005, VI: 2007, VII: 2011, VIII: 2015. Slovakia: I: 1992, II: 1994, III: 1998, IV: 2002, V: 2006, VI: 2010, VII: 2012, VIII: 2016.

Table 4.

Vote concentration in sample countries

Note: *Indicates that changes of entry barriers can be observed before the actual elections.

Czechia

In the Czech Republic, concentration in the market for parties (i.e., our dependent variable) changed in two major waves. The first wave started in 1992 and lasted until the third election in 1998. The 1996 election was the first during which two major parties competed for seats – the centre‐right ODS (Civic Democratic Party) and the centre‐left ČSSD (Czech Social Democratic Party). The party system became even more concentrated by the time of the next election in 1998. In the second wave from 2006 to 2013, the concentration index decreased – first drastically, then moderately.

As for our explanatory variables, entry barriers in the market for parties were changed on three occasions. First, the amendments adopted in 1994 and first applied during the 1996 elections were aimed at amending the rules concerning the establishment of party lists and party funding by the state (the electoral system remained unchanged during this reform). A new condition to establish a party list was introduced: a CZK200,000 electoral deposit was payable per electoral district. In effect, this required a CZK1.6 million deposit for each party that wanted to nominate a list in each of the eight electoral districts. This deposit was only refundable for parties that received at least 5 per cent of the votes in the general election.

The package of funding rule amendments was aimed at meeting three objectives. It increased both the threshold of eligibility for state funding and the overall level of party funding, while introducing a brand‐new form of funding as well. For the reimbursement of electoral expenses based on the share of the votes received, the threshold for eligibility was increased from 2 to 3 per cent of votes. At the same time, the amount of funding available to this end was increased sixfold. The sum of the vote‐based permanent subsidy increased decisively as well, and a new seat‐based permanent subsidy was introduced. Table 5 provides an overview of the rule changes prior to 1996 and for all other elections in the period investigated.

Table 5.

Pre‐election entry barrier changes in Czechia

Note: + and – indicate a change with limited, albeit still discernible impact. ++ denotes a more significant impact.

Another slew of changes was initiated during the 1998–2002 parliamentary cycle with a view towards resolving a brewing political crisis. After the impasse following the 1996 elections, the 1998 elections once again resulted in a political deadlock. Neither winner of the elections (the ODS in 1996 and the ČSSD in 1998) was able to form a majority government. The resolution came in the form of a pact according to which the social democrats established a single‐party minority government in 1998. This option was put on the table leading up to the so‐called ‘opposition agreement’. The minority government was supported by the opposition ODS in exchange for concessions by the new governing party (Roberts Reference Roberts2003). As a result, the amendments of the electoral law adopted by the two major parties in 2000 contained rules that benefited them. Even though it retained the proportional electoral system, it also introduced rules for the allocation of seats which disadvantaged smaller parties.

The law was eventually annulled by the Constitutional Court and was replaced by a watered‐down version. The actual amendments that entered into force in 2002 did not introduce radical changes, but they still contained elements that favoured big parties and decreased the level of fragmentation in order to help the creation of stable majority governments (for more details, see Birch et al. Reference Birch, Millard, Popescu and Williams2002: 85–86; Nikolenyi Reference Nikolenyi2003: 327–328). First, district magnitudes were decreased: in the previous electoral system, 25 seats were allocated in an average electoral district, which decreased to 14.3 as a result of the reform. At the same time, the electoral threshold regarding electoral coalitions was increased. A third element referred to the electoral system: the electoral formula changed from a two‐tier Hagenbach‐Bischoff method to the d'Hondt method, which slightly favours larger parties.

The rules concerning the state funding of parties also changed. The threshold for the one‐time vote‐based reimbursement was decreased from 3 to 1.5 per cent. Nevertheless, other reforms benefitted incumbent parties in the market for parties. Even as the vote‐based reimbursement increased moderately, the sum of the vote‐based permanent subsidy, which had been first introduced in 1994, showed a twofold increase. A similar rise applied to the seat‐based permanent subsidy. The issue of electoral deposits was a mixed bag from the perspective of our proposition concerning entry barriers. While the district‐level deposit was lowered, the fee was no longer refundable. In sum, the amendments preceding the 2002 elections led to higher entry barriers.

Hungary

Here we only provide a brief overview of major changes to the entry barriers in Hungary. We will discuss some developments in the Hungarian political system in more detail later in the article. Based on the analysis of the Herfindahl index, the period between 1990 and 2006 showed increasing concentration in the Hungarian party system.Footnote ⁴ Two alternating parties dominated the party system until 2010, the left‐wing Hungarian Socialist Party (MSZP) and the right‐wing Fidesz. Then, with the weakening of MSZP and the rise of Jobbik, a party positioned on the radical right, a new, trifurcated system emerged. Having said that, in view of the fact that an H‐index value of over 1800 indicates a concentrated market, the market for parties was still highly concentrated in terms of party list votes. The 2010 and 2014 elections did not lead to drastic changes in the established market structure. The concentration of seats held by each party practically stagnated, while the list‐based concentration indicator decreased, mainly because of the approximately 400,000 votes lost by Fidesz. Minority lists, a new element in the institutional setting, did not have a significant bearing on this state of affairs.

As for our explanatory variables, entry barriers in the Hungarian electoral system were changed on only two occasions. The first modification, enacted before the 1994 election, involved raising the threshold for party lists from 4 to 5 per cent of votes. With respect to the requirements for establishing party lists and nominating candidates, electoral regulations remained unchanged until 2010. Entry barriers were first set at a lower level before the 2014 elections: the number of required signatures that were to be collected in single‐member districts (SMDs) was reduced and voters now had the choice to recommend multiple candidates. Even with changes regarding the national list – for which more signatures were required as compared to the previous period – the net impact of entry condition changes pointed clearly towards lower barriers. Other than the aforementioned instances, the rules of nomination for regional and national compensation lists, winning seats in parliament and receiving a state subsidy were more or less stable throughout the period in question. Table 6 provides an overview of these rule changes.

Table 6.

Pre‐election entry barrier changes in Hungary

Note: + and – indicate a change with limited, albeit still discernible impact.

Source: Own research, with additional data from Birch (2003: 134).

Poland

In Poland, the concentration of votes progressively increased between the first election in 1991 and the fourth in 2001. The 2005 election was an outlier in this trend, which continued until 2007. The last two elections showed a gradual decrease from the peak value in the sixth election. Along with Hungary, Poland also showed higher spreads between the minimum and maximum values of the Herfindahl index vis‐á‐vis the other two countries in the sample.

On the explanatory variable side, the Polish regulatory environment showed remarkable instability (Benoit & Hayden Reference Benoit and Hayden2004; Millard Reference Millard2010). It is useful to consider the rules preceding the 1991 elections when evaluating subsequent institutional changes. One characteristic of the ‘legacy’ regulation was the lack of an explicit parliamentary threshold: the 5 per cent threshold limited only the allocation of mandates from the national lists. This feature of the electoral system had a decisive impact: 29 different formations acquired at least one mandate in the Sejm and the party with the most votes received only 12.3 per cent of the votes cast. A string of government crises ensued resulting in early elections. The institutional changes that followed were almost exclusively aimed at increasing entry barriers in the market for parties.

The relevant rule changes are presented in Table 7. First, the 5 per cent threshold was extended to regional lists, and the threshold concerning the national list was increased to 7 per cent. Second, the number of electoral districts was increased, leading to smaller district magnitudes. The third amendment changed the electoral formula to the d'Hondt method, which, as we previously pointed out, slightly favours larger parties. Regarding state funding, a one‐off election refund was introduced, which exclusively benefitted parliamentary parties. There was only one aspect of these reforms that led to a lowering of entry barriers: the number of signatures required for registration was decreased to 3,000 from the former 5,000 per regional district.

Table 7.

Pre‐election entry barrier changes in Poland

Note: + and – indicate a change with limited, albeit still discernible impact. ++ and – – denote a more significant impact. Minor changes are signaled with a 0.

A comprehensive system of government funding for parties was only established before the 1997 elections. The sum of the one‐off election refund provided to parliamentary parties was decisively increased. At the same time, a vote‐based permanent subsidy was introduced for parties that received at least 3 per cent of the votes. The electoral system was modified again before the 2001 elections. One of the arguments for amending the system was the ongoing administrative reform of Poland. Political developments also played a role: by early 2001, the left‐wing opposition party the Democratic Left Alliance (SLD) was a clear front‐runner in the upcoming elections. All other parties had a vested interest in making sure that the electoral system became more proportional so that the SLD did not win too overwhelmingly.

The electoral reforms that followed decreased the number of districts and also introduced a new formula which favoured smaller parties. The national list was also abolished. Furthermore, new rules applied to the government funding for parties. The one‐off refund was maximised at the level of actual expenditures and the vote‐based subsidy was changed to a tiered degressive schedule. In an interesting twist, the number of signatures required for registration of electoral committees was once again set at 5,000 per electoral district. The rules of 1993 were restored with regard to the electoral formula, which means that mandates were allocated on territorial lists according to the d'Hondt method preferring larger parties.

Slovakia

Slovakia stands out among the four countries with its relative stability in terms of the Herfindahl index. The spread between its highest and lowest values is around half of the same indicator for Poland or Hungary. The only longer wave of unidirectional value changes occurred between the fourth and seventh elections in 2002 and 2012, respectively.

However, no similar stability was detectable on the explanatory variable side. In fact, the 2012 election was the only one during the examined period that was not associated with a preceding amendment of the relevant rules. The first changes, adopted before the 1994 elections, concerned the voter‐based reimbursement. In terms of their general approach, the amendments were similar to those in the Czech case: both the threshold for eligibility and the sum of the subsidy were increased. The next institutional change was enacted a few months before the 1998 elections. It radically increased the threshold requirements for establishing a joint list by multiple parties. The aim of this amendment was to hinder the efforts of anti‐Mečiar democratic forces and the parties of ethnic Hungarians living in Slovakia in setting‐up a competitive opposition list (Lebovič Reference Lebovič, Bútora, Mesežnikov, Bútorová and Fisher1999). The rule changes prior to 1994 and all other elections in the period are summarised in Table 8.

Table 8.

Pre‐election entry barrier changes in Slovakia

Note: + and – indicate a change with limited, albeit still discernible impact. ++ and – – denote a more significant impact. Minor changes are signaled with a 0.

A second modification concerned district magnitude. Slovakia was divided into four territorial districts up until the 1998 election and the rule changes of the time created a single electoral district. Although in theory a larger district magnitude ensures a more proportional allocation of mandates, it needs to be emphasised that the district in Slovakia had been fairly large to start with. In all, 12 seats were allocated in the smallest electoral district and a further 40–50 seats was available in each of the other three districts. As a consequence, the single, national‐level electoral district did not significantly increase the chance for small parties to gain parliamentary seats. All in all, the 1998 reforms resulted in higher entry barriers for parties.

During the 1998–2002 parliamentary cycle the institutional variables changed in two respects. The rules from before 1998 concerning electoral coalitions were restored, which made it easier for smaller parties to enter parliament. A seat‐based permanent subsidy was also introduced. Finally, the reforms adopted in 2004 led to a comprehensive increase of entry barriers. First, a relatively high electoral deposit of SKK500,000 was introduced, which was refundable for parties that acquired at least 3 per cent of the votes (this eligibility threshold was lowered before the 2006 elections). Second, the vote‐based reimbursement was tied to nominal average salary, which is a decisive increase. Third, both the seat‐based permanent subsidy and the vote‐based reimbursement were tied to nominal average salary.

Summary of comparative results

Our hypothesis posited that the modification of entry barriers in the market for parties leads to changes in the concentration of the popular vote for party lists. Table 9 provides an overview of our results with respect to this hypothesis.

Table 9.

Party vote concentration change in four countries

From the ten instances when the change in concentration exceeded 5 per cent, we confirmed the hypothesis for eight observations. This is an 80 per cent success rate, which drops to 67 per cent if the ‘no results’ are also included. A basic linear regression of the institutional change dummy on the H‐index associated with these cases yielded a strong but non‐significant result (r = 0.511 with a standard error of 1.76). Nevertheless, the usual cautionary notes apply: only a larger sample could yield sufficiently valid results with respect to the hypothesis and the given region/period.

Similarly, country‐specific results should be treated with even greater caution due to the low number of observations. On the one hand, Hungary is the best‐behaved in this respect with a 100 per cent confirmation rate. On the other hand, the hypothesis did not have a clear‐cut predictive value for Poland, where two confirms are set against one reject and an excluded case. Results for Czechia and Slovakia are mostly positive, but only if we exclude value changes under 5 per cent for the former.

One of the most important contingencies of this analysis is that party vote concentration as indicated by Herfindahl index values may be affected by variables other than entry barriers. Under ideal conditions this qualification would not interfere with our test of the hypothesis since we only contend that, ceteris paribus, entry barrier changes should have an impact on party vote concentration. A further analysis of ‘reject’ cases could shed a light on factors that upset the ceteris paribus condition. By including these control variables in the analysis, and by increasing the number of observations, we could arrive at a more precise picture of the causal mechanism linking entry barriers and the structure of party markets.

The logic of strategic entry barrier changesFootnote ⁵

Our comparative analysis lends support to our hypothesis regarding the effect of entry barrier changes on political market structure. Nevertheless, it only describes a correlation between the observed variables and our causal inferences are mainly based on the element of time: changes in market structure followed entry barrier changes. In order to better understand the causal logic linking institutional and market structure change, we have to look under the hood of our theory of political markets.

In our view, the strategic behaviour of incumbent parties offers insights concerning the logic of entry barrier changes. By ‘incumbent parties’ we mean (1) a single‐party majority government, or (2) a coalition party majority government at the time when the rule changes were enacted. The incumbent parties have both the incentives (a necessary condition) and the parliamentary majority (a sufficient condition) for acting on those incentives. One such case was the electoral reform in Slovakia before 1998. The reform proposal was supported by three coalition parties while the opposition and new parties outside parliament were opposed. Provided that the interests of the parties forming the coalition are aligned, the logic of entry barrier changes prescribes the lowering of entry barriers in the market for parties and increasing the level of entry barriers on the market for government. This may be achieved, inter alia, by a loosening of the rules of candidacy, on the one hand, and the introduction of a majority compensation system, on the other.

Needless to say, many special cases pose a challenge to this generic description of strategic incumbent behaviour. First, the natural alignment of interests between coalition partners is generally far from automatic. Second, a separate large party‐small party dynamic may also come into play when major government and opposition parties form an alliance to pass legislation that manipulates entry barriers to the detriment of smaller parties and out‐of‐parliament challengers. We presented the case of the post‐1998 electoral reforms in Czechia. These reforms were the result of an ‘opposition agreement’ between the ČSSD and the opposition party ODS. Other, smaller parties in parliament opposed this compact, which clearly shows that the dynamic that was at play here was different from a standard government‐opposition scenario.

Finally, institutional changes may also have unintended consequences that interfere with how the posited relationship between entry barrier modifications and market structure changes play out in real‐life politics. Many other factors may have a bearing on the market concentration in the market for parties besides institutional changes concerning entry barriers. Having said that, our aim was not to explain the causes of market structure change but to explore the proposed relationship between one type of institutional change (entry barrier change) and market structure change. These special cases notwithstanding, the logic of multi‐market entry barrier changes may provide an explanation for the causal relationship between institutional change and market structure change. The mechanism of strategic entry barrier change would be best illustrated by in‐depth descriptions of individual cases. Here, we offer one such example: the effects of the electoral rule changes in Hungary in 2011.

A case study of strategic entry barrier changes

For 20 years, Hungary showed remarkable stability in CEE in terms of its electoral rules. This created a favourable setting for a quasi‐experiment regarding the effects of entry barriers on political markets. The Hungarian case also offers a clear‐cut implementation of the strategic behaviour that is a corollary of our underlying hypothesis. Ágh (Reference Ágh1995) considered the Hungarian party system ‘stable’, while Toole (Reference Toole2000) emphasised how it stabilised ‘much more quickly than expected’ and how it was ‘already nearly as stable as more mature party systems’. Toole also went on to suggest that stabilisation is partly ‘the product of … electoral system design’.

Even as Kitschelt et al. (Reference Kitschelt, Mansfeldová, Markowski and Tóka1999: 118) portray the Hungarian party system as one combining ‘volatility and stability’, they highlight the fact that there was a ‘drop’ in both electoral and legislative fragmentation over time. Enyedi (Reference Enyedi, Katz and Crotty2006: 231) confirms this tendency by noting that only one new parliamentary party emerged over a decade of political development. Enyedi and Tóka (Reference Enyedi, Tóka, Webb and White2007: 172) go as far as to claim that this consolidated nature of the Hungarian party system poses a ‘puzzle’ in light of the social and economic turbulence in the surrounding region during this period.

After its election victory in 2010 the governing Fidesz party began to radically reshape the country's constitutional arrangements. One important element in the changes adopted was the promise to reduce the size of the Hungarian parliament, the National Assembly, which provided the majority with legitimate grounds for rewriting the electoral and parliamentary rules. The changes included many components that were not closely connected to entry barriers but affected the ‘auction’ in the market for government: an important example is the redrawing of the SMD boundaries. Competition in the market for government, therefore, was highly affected by the changes in the regulations for the market for parties.

In the competition for a natural monopoly, the incumbent's short‐term goal was to limit the strategic options of major competitors; to gain a relative campaign advantage (in terms of finances, in‐kind contributions, media); and to increase the number of the actors in the market for parties without significantly decreasing the concentration, as the fragmentation of the opposition was also an important goal. Table 10 provides a summary of these developments.

Table 10.

Strategic decisions influencing the market for parties and government

Note: SMDs = Single‐member districts.

The first and most important tool of limiting strategic options was to change the two‐round election system (with a run‐off) into a one‐round system. This effect was reinforced by changing the ratio of list‐based and SMD seats, and as a result the majority of MPs were now elected in single‐member constituencies. The strategic options of the opposition narrowed because the election campaign, which was based on joint candidates in the SMDs but separate national party lists, caused a cacophony and several strategic U‐turns on the opposition side. Though this particular outcome could not have been predicted at the time when the corresponding rules were amended, the targeted change of the incentives pertaining to entry barriers was certainly a conscious decision on the part of Fidesz. A specific example was the newly raised threshold for parties which nominated a joint national list, which applied to the case of the Together party (Együtt‐PM) in its capacity as a competitor of MSZP: in a more proportional two‐round system, fewer voters would have had to split their votes in the first round, and the result might have been a clearer and thus more successful strategy for the challengers (also see the example of the Alliance of Free Democrats [SZDSZ] between 1998 and 2006). Third, the regulation of campaign costs hedged the risk of a joint left‐wing list by giving the actors significantly diminished resources as compared to what they would have received had they competed separately.

These and other strategic moves by Fidesz present a classic case of incumbent strategy in political markets: decreasing the entry barriers at the middle level of the pyramid while increasing them at the top. A series of other measures meant to buttress this strategy, which eventually resulted in an explosion in the number of party lists, with as many as 18 national party lists were registered in 2014, as opposed to only six in 2010. This was the result of a deliberate decision to open up the market for parties. In so doing, Fidesz exploited its incumbent position in the market for government in order to create a vertically integrated political venture at all three levels of the political market.

Although the Hungarian example offers the most clear‐cut case for the incumbent strategy described above, many other electoral reforms can be traced back to one version or the other of the generic strategy of exploiting the possibilities of entry barrier manipulation. The 1998 amendments of the electoral law in Slovakia, which raised the threshold for pre‐electoral coalitions and restricted parties’ access to the media, was a reflection of a similar strategy on the part of the then‐ruling People's Party (HZDS).