Academic journal article Atlantic Economic Journal

Some Considerations about 1992

Academic journal article Atlantic Economic Journal

Some Considerations about 1992

Article excerpt

Some Considerations About 1992

I.

The Economist's issue of July 1988 pointed out that, somehow, the horizon of 1992 has also become a state of mind. Indeed, not only tons of research are being carried out to clarify the possible impact of an integrated market, but also newspapers and magazines as well as politicians contribute to magnify the wonders and prospects that a single market is likely to bring about.

This paper attempts to contribute to the literature on the subject. In particular, the paper focuses on some aspects relating to industrial markets which, in the author's view, have been either under or overstated. One is the role of natural, non-fictitious, entry barriers; the question arises as to how oligopolistic interaction will be modified with market integration. The second is the role of small and medium enterprises in markets where entry barriers arise from market segmentation.

Unfortunately, one is not able to provide empirical estimates of how these considerations are likely to modify those which have already been made. Nonetheless, in some cases the sign of the change will become clear. First, one can argue that in tight oligopolies, where there are significant non-fictious trade barriers, the estimated gains from integration are upwardly biased. This is due to two reasons. The first is that one must distinguish between the possibility of potential efficiency gains due to integration and whether or not these potential gains will be materialized in the post-integration market outcome. The second reason is that integration involves a change in the setting of oligopolistic rivalry. It is argued that such a change may be associated with modifications of firms' business strategies, which may be surprising at a first glance. Specifically, it is shown that changes in oligopolistic interaction may imply that the generation of intra-industry trade will not be as significant as expected. More surprisingly, the paper discusses the possibility of market integration leading to a decrease in intra-industry trade in industries where it is now present.

Next, it is argued that in industries which are not natural oligopolies the estimated gains from integration are likely to be biased downwards. Indeed, not only is entry likely to occur, but the permanent threat of entry will probably enhance competition. Particularly emphasized is the role of small and medium enterprises in this respect.

Section II first presents the basic setting and empirical estimates of welfare gains from integration of the main study about 1992. It then proceeds to point out the drawbacks from a point of view of industrial organization. Section III discusses the implications of some theoretical research on market integration and notes that it leads to a rather pessimistic outlook on 1992, at least for industries which are natural oligopolies. In Section IV, all the above considerations are applied to the car industry. Section V focuses on the role of small and medium enterprises vis a vis the success of 1992. Some concluding remarks close the paper.

II.

The most well known and comprehensive study about 1992 is the so-called "Cecchini Report" [Emerson, 1988] which estimates the gains of removing non-tariff barriers, border controls, and restrictions on public procurements as well as liberalizing financial services, both at a microeconomic and macroeconomic level.

The basic framework behind the Cecchini Report can be summarized as follows. The removal of non-tariff barriers arising mostly from the lack of standardization and heterogeneous fiscal treatment will bring about a cost reduction which is likely to turn into both higher price and cost margins and lower prices. The decrease in prices will lead to an increase in the production of goods and services, which will allow exploitation of comparative advantages and economies of scale, resulting in higher price and cost margins. …

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