Anthony J. Venables

Completing the Internal Market in the European Community: Some Industry Simulations

This paper studies the effects of changes in the internal market of the European Community in a partial equilibrium model of imperfect competition with economies of scale. The model is numerically calibrated to data on ten industries and the effects of two types of policy change are simulated. The first is a reduction in intra-EC trade barriers equivalent to a reduction in implicit tariffs by 2.5 percentage points; the second is the elimination of firms ability to price-discriminate between different national markets. Sensitivity analysis of alternative ways of modelling firms behavior suggests that the results are reasonably robust. The simple reduction in intra-EC trade barriers generates modest welfare gains, but much more substantial gains are associated with integration of national markets into a single European market.

Trade Policy with Increasing Returns and Imperfect Competition: Contradictory Results from Competing Assumptions

A number of recent papers reach different conclusions concerning the effects of trade and industrial policy on imperfectly competitive industries; the implications for policy are therefore sensitive to assumptions concerning both firm behaviour and market structure. This paper sets out a single model within which policy can be examined under a variety of assumptions concerning market structures. The results obtained from this model can be compared to results already obtained in the literature, and the model allows further analysis of some interesting cases. We consider the four types of market structure generated by oligopoly versus free entry, and segmented markets versus integrated markets. By employing simple functional forms we are able to make direct comparisons between these cases. We conclude that the effects of trade and industrial policies are greater when markets are segmented than when they are integrated, and that, if transport costs are small, policy is more potent when the number of firms is fixed than when there is free entry.

International capacity choice and national market games

A series of models are developed in which international trade is modelled as a two-stage game between firms in two countries. At the first stage firms choose their productive capacity. At the second stage different types of market game are played. The most interesting case is that in which firms play a separate price game in each national market, given their worldwide capacity levels. It is established that (i) firms use capacity strategically, in order to manipulate the distribution of rivals output between markets; (ii) the volume of intra-industry trade is intermediate between the two cases most extensively studied in the trade literature (integrated- and segmented-market Cournot equilibria); and (iii) countries gain from small import tariffs and export subsidies, but these gains are less than in the case of segmented markets and a Cournot equilibrium.

The economic integration of oligopolistic markets

Abstract Economic integration may take the form of reductions in the cost of trade, and of reductions in the extent to which firms regard markets as being internationally segmented. This paper uses a model of international trade under oligopoly to investigate the implications of these two types of integration.

Economic Integration and Market Access.

Traditional analysis of the effect of economic integration on the rest of the world draws unambiguously pessimistic conclusions. Integration causes trade diversion which reduces demand for the rest of the world’s exports, and reduces supply of its imports. The rest of the world’s terms of trade may therefore deteriorate with associated welfare loss. As is widely recognised, this analysis gives an inadequate description of the current phase of European integration. Study of European integration must incorporate imperfect competition, scale economies and intra-industry trade. The implications of these considerations for the effect of economic integration on the rest of the world have been discussed by Corden (1972), Robson (1987), Pelkmans (1984) and, in the context of the effects of 1992 on EFTA, Norman (1989). These considerations raise the possibility that consumers in the rest of the world may benefit from integration; supply side improvements in the integrating economy (for example lower marginal costs if there are increasing returns to scale, or the production of more product varieties) may spill over into rest of the world markets. However, the effects of integration on firms in the rest of the world is again negative they suffer reduced market shares and perhaps lower profits. This is illustrated in Smith and Venables ( 1988). The second way in which current European integration is not adequately described by traditional theory is that the integration process is not the removal of taxes and tariffs, but the alteration of rules and regulations. The process thus has direct effects not only on EC firms, but also on firms from

Constrained Optimal Trade Policy for Imperfectly Competitive Industries

Much of the literature on trade policy under oligopoly is concerned with establishing the welfare effects of small changes in some particular policy instrument, such as export subsidies or import tariffs. The welfare effects of these instruments are derived from their effects on the economy’s terms of trade, and on the scale of operation of ‘distorted’ domestic activities. Typically the literature makes little attempt to distinguish whether a policy is changing welfare through the terms of trade or through distortions. Furthermore, there has been little exploration of the interaction between different policy instruments. For example, how is the case for trade policy altered if other policy instruments are being used to manage domestic distortions? This approach is in marked contrast to the theory of policy developed for perfectly competitive economies. Here the method is to isolate the effects of policy on terms of trade and on distortions, and consequently to derive a theory of policy targeting. Trade policy should be used to manipulate the terms of trade and other instruments used to counter domestic distortion.