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Reductions in Real versus Tariff Barriers: The Effects on Industry Concentration

  • Schröder, Philipp J.H.
  • Jørgensen, Jan G.

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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File URL: http://mpra.ub.uni-muenchen.de/124/1/MPRA_paper_124.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 124.

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Date of creation: 2001
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Publication status: Published in Journal of Industry Competition and Trade 4.3(2003): pp. 251-268
Handle: RePEc:pra:mprapa:124
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Web page: http://mpra.ub.uni-muenchen.de

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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  2. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October.
  3. repec:ccp:journl:v:68:y:2001:i:269:p:1-26 is not listed on IDEAS
  4. Baier, Scott L. & Bergstrand, Jeffrey H., 2001. "The growth of world trade: tariffs, transport costs, and income similarity," Journal of International Economics, Elsevier, vol. 53(1), pages 1-27, February.
  5. Davies, Stephen & Lyons, Bruce, 1996. "Industrial Organization in the European Union: Structure, Strategy, and the Competitive Mechanism," OUP Catalogue, Oxford University Press, number 9780198289739, March.
  6. Drud Hansen, Jørgen & Guldager Jørgensen, Jan, 2001. "Market Integration and Industrial Specialization on a Monopolistic Competitive Market," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 16, pages 279-298.
  7. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  8. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  9. Azzam, Azzeddine M, 1997. "Measuring Market Power and Cost-Efficiency Effects of Industrial Concentration," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 377-86, December.
  10. Lyons, Bruce & Matraves, Catherine & Moffatt, Peter, 2001. "Industrial Concentration and Market Integration in the European Union," Economica, London School of Economics and Political Science, vol. 68(269), pages 1-26, February.
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