Economic integration in Europe has had ambiguous effects on industry concentration. The literature has proposed various explanations of the empirical findings. The present paper provides an additional theoretical argument. We show that in a world of monopolistic competition, integration in it self (modelled as a reduction of trade barriers) generates opposing effects on industry concentration, depending on wether the barrier is a real (frictional) or a tariff cost. In particular, the Herfindahl index of industry concentration falls for a reduction in real costs, but rises for a reduction in tariff costs. The reason is that real barriers burn up resources, such that industry profitability is reduced, reducing entry, and resulting in fewer firms and higher concentration. Under a tariff barrier, the redistributed tariff revenue stabilises industry profitability, resulting in more firms and lower concentration.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
124.
Length: Date of creation: 2001 Date of revision: Publication status: Published in Journal of Industry Competition and Trade 4.3(2003): pp. 251-268 Handle: RePEc:pra:mprapa:124
Find related papers by JEL classification: L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms F15 - International Economics - - Trade - - - Economic Integration F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
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