Product standards, imperfect competition and completion of the market in the European Union

Abstract

The authors model the static and steady-state effects on trade, production, and market structure of completion of the European Union's (EU's) internal market. The impetus for change comes from the removal of border costs and the costs of producing to different national standards. It also comes from consumers'greater ability to substitute among the products of producers in different EU countries, once the European Union adopts its program on standards. In the analysis of the static scenario, removing border costs and the costs of supply-side standards improves the welfare of EU countries by only about 0.5 percent of Gross Domestic Product (GDP). Results vary greatly across the countries of the European Union, however, because the benefits to a country are roughly proportional to its share of intra-EU trade in its GDP. This is the first model to identify these countrydifferences because of the greater country disaggregation. The additional effect of the program of standards on consumer demand elasticities increases the competition and reduces markups in imperfectly competitive industries. Then there are additional gains from rationalization, as well as consumer efficiency gains in imperfectly competitive sectors, that result in an increase in the estimated gains to about 1.2 percent of GDP (again with wide differences across EU countries). The steady-state results let the capital stock in each country adjust to its new higher equilibrium value, which acts as an additional endowment of capital, allowing the European Union to produce a higher level of income. The gains to the European Union then rise to about 2.6 percent of GDP.

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