Economic Integration as Competitive Discipline

Abstract

This paper reexamines the standard notion that economic integration will promote competition. Using an illustrative model, it is shown that integration will indeed enhance competition if the foreign firm is the low-cost producer. But if the foreign firm is the high-cost producer, integration will retard competition if the initial tariff level is low. The results of this paper suggest that trade liberalization does not always provide competitive discipline. Competition policy must still be actively enforced even when economies are becoming increasingly open. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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