European Integration
An imperfect `1992'

The `conventional wisdom' on the completion of the European Community's 1992 programme is that imperfectly competitive markets have enabled firms to charge relatively high prices in home markets and `dump' goods abroad at lower prices. Once markets are fully integrated, however, firms should no longer be able to treat different European countries or regions separately, and they must set prices and quantities based on their overall positions in the single European market. Since their average market shares are lower than their shares in the home market, firms are expected to lose market power and price at a lower level than before; and increased competition is expected to result in consumer gains and producer losses.
In Discussion Paper No. 574, Research Affiliates Jan Haaland and Ian Wooton use a simple model of international trade based on imperfect competition to compare the equilibria of segmented and integrated markets. They find that competition can diminish and all prices rise as a result of integration if firms that can no longer reduce foreign prices alone find it more expensive to retain foreign market shares; consumers then suffer welfare losses. Even if only foreign prices increase, a reduction in domestic prices will be required to outweigh the rise in import prices if consumers are to gain. A firm's inability to price discriminate will also tend to lower its profits, while its competitors' inability to do so will tend to increase its market power and hence its profits: the net effect of integration on profits is therefore ambiguous.
Haaland and Wooton argue that these results reflect the remaining biases between national sub-markets, which cause the equilibria in integrated markets and in a single market to differ. Comparisons of market shares under the segmented and integrated market regimes therefore cannot adequately explain the effects of full market integration on competition. Reduced trade costs among the integrated countries and increased domestic competition increase the likelihood that integration will reduce home-market prices and yield gains for consumers.
Haaland and Wooton suggest that these curious results of integration may stem from the elimination of `wasteful' trade previously arising from segmented markets' imperfectly competitive structure. They conclude that price discrimination alone cannot ensure that the integrated market is more competitive than the segmented market. This also requires action to minimize biases between markets and prevent the emergence of monopoly suppliers. Strong demand for home-produced goods requires strong domestic competition to ensure that the gains from integration are achieved.

Market Integration, Competition and Welfare
Jan I Haaland and Ian Wooton

Discussion Paper No. 574, August 1991 (IT)