INTEGRATION UNDER IMPERFECT COMPETITION TRADE AND COMPETITION POLICY

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INTEGRATION UNDER IMPERFECT COMPETITION TRADE
AND COMPETITION POLICY

• Aim
• To analyze the effects of economic integration on
  competition and market structure
• Structure of the lecture
• Regional integration under imperfect competition
• customs union analysis
• monopolistic competition
• Integration and market structures
• Oligopoly and market power
• Effects on competition
• European integration
• Competition policy
• versus trade policy
• AD

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I. Regional integration under imperfect
competition

• Traditionally
• Customs union theory and imperfect competition
  (Corden)
• Introduces economies of scale
• Shows importance of market size for exploitation
  of scale economies

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• Modern integration
• Monopolistic competition and intra-industry trade
  (Baldwin Venables, 1995)
• RegionaI integration
• Production shifting implies more varieties in the
  RIA and lower prices ? welfare increase in
  member countries

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II. Integration and market structure

• Integration under imperfect competition
• Increased competition
• Reduced monopoly power ? mark-up ?
• Increased sales on foreign markets where mark-up
  is lower
• ? Increased production/sales and average firm
  size increase as exploitation of scale economies
• Price convergence and lower prices, reduction in
  price-costs marginals
• Industrial restructuring

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• Effects of European integration
• The single market,
• average firms size
• concentration
• prices
• Look at data on mergers and acquisitions (MA)
• MA a way for firms to expand

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Value of cross border MA purchases, by region
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• Empirical evidence cont.
• Smaller countries more MA than larger countries
• Allen, Gasiorek and Smith (1998)
• single market affected smaller countries in
  particular when it comes to market structure and
  prices (lower price costs marginals and higher
  competitive pressures)
• Market concentration
• Stable at the EU-level
• Large variations across industries (most
  concentrated industries in the late 1980s
  experienced most profound changes)
• Prices
• Price convergence in the 1990s
• Mark-ups decrease on average 4 percent

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• Industrial restructuring in the face of
  integration
• 1. Risk for collusion as number of firms
  decrease?
• 2. Danger that countries subsidize less
  efficient firms (state aid to profit losing
  firms)
• Evidence
• MA driven by increase in productivity a response
  to lower profit marginals
• Incentives for collusion and strategic agreements
  could increase (EU, NAFTA, Mercosur)
• Competition policy and anti-competitive behaviour
• Perfect collusion monopoly
• Partial collusion less risk of cheating, still
  too many firms and welfare losses

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III. Competition policy and trade policy

• Trade policy producer interest
• Competition policy consumer interest
• Levinsohn
• Competition policy and international trade
• Small country
• Liberal trade policy, no explicit competition
  policy
• CRS and oligopoly
• Trade policy (protect domestic producers) and
  competition policy (restricting market power)
  often in conflict

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• IRS
• Monopolistic competition
• Liberal trade policy, no active competition
  policy
• Oligopoly
• Requires coordination of trade and competition
  policies with not too active competition policy,
  otherwise the policies contradictory

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• Wooton Zanardi
• Anti-dumping (AD) versus anti-trust
• Implications for competition policy when regional
  integration
• AD
• Dumping could justify AD measures
• Affected industry to prove that it has been
  substantially injured by the dumping of a foreign
  firm
• If investigation shows dumping ?AD measures
  towards a single producer (duties or price
  undertakings)
• Countries with AD legislation increased with
  trade liberalization, mainly in developing
  countries
• Correlation between GATT/WTO membership and AD
  laws AD increase as tariff decrease

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• When is competition policies justified?
• AD
• If predatory dumping aiming at driving out
  competitors and obtain monopoly power. In
  reality, very little connection to predatory
  dumping
• Indirect effects and distortions possible but
  more difficult to quantify
• AT
• To prevent collusive behaviour, main intention to
  encourage competition
• Problem that difficult for a single country to
  control firms outside its national borders (also
  difficult with foreign firms in the domestic
  market)