Standard import demand equations cannot explain secular shifts in market shares and are therefore unsuited to the assessment of the effects of the European Community's single-market programme on international trade. In Discussion Paper No. 707, Research Affiliate Joaquim Oliveira-Martins and Joël Toujas-Bernate therefore use a monopolistic model of international trade in which the supply of industries with a large number of firms is modelled as a bundle of differentiated products rather than as a homogeneous good, so the number of products or equivalently the number of firms at a macro level and prices jointly determine market shares.

They conduct empirical tests for France, Germany, Italy and the UK and for the textiles and leather, chemical products and electrical machinery industries, using an activity index which should be a good proxy for the rate of new firm creation in a fragmented market. They first try to establish a long-term relationship between market shares and relative prices using a simplified model with price effects only, but in many cases no such relation exists. An extended model including non-price effects performs better in seven out of twelve cases, but the estimated price elasticities are low. The estimated elasticities of non-price effects are much higher, which may indicate a high value placed on product variety in European markets, with major implications for the effects of market integration. They use these estimated parameters to simulate a counterfactual 10% reduction of domestic producers' prices, which has differentiated effects across markets, although the average movements of market shares are small.

These findings support the conventional wisdom that price movements induced by market integration will have only a moderate impact on market shares; but integration that induces large changes in market structure and in particular in the number of competing firms could have a much greater impact.

Macroeconomic Import Functions with Imperfect Competition. An Application to the EC Trade
Joaquim Oliveira-Martins and Joël Toujas-Bernate

Discussion Paper No. 707, July 1992 (IT)