Working Paper: CEPR ID: DP474
Authors: Alexis Jacquemin; André Sapir
Abstract: Theoretical and empirical research suggests that import competition within European markets imposes a major constraint on domestic firms's price-cost margins. The programme for the completion of the European Community's (EC) internal market by 1992 is largely based on the effects expected from a reinforcement of such a constraint. But imports from the rest of the world could also exercise an important trade discipline on European market performance. In fact there are various arguments suggesting that the disciplinary effect of extra-EC imports could be stronger than that of intra-EC imports. The paper develops an empirical model to measure the relative strength of import discipline on price-cost margins in European industries. We find that both potential and actual competition induced by imports are effective in narrowing such margins. Furthermore, trade discipline varies not only according to various features of industry but also according to the origin of imports: only extra-EC imports were found to exercise a significant impact on price-cost margins.
Keywords: european integration; import competition; market structure; imperfect competition; commercial policy
JEL Codes: 422; 423; 611; 616; 631
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| import penetration (K24) | profits (L21) |
| profits (L21) | import penetration (K24) |
| extra-EC imports (F14) | price-cost margins (D40) |
| intra-EC imports (F15) | price-cost margins (D40) |
| trade barriers (F14) | profits (L21) |
| liberalization of the European market (F15) | market power of domestic firms (L10) |