EU and the Euro Crisis

Institut für
Ökonomie und Recht
der globalen Wirtschaft
EU and the Euro Crisis
Course for students from UTEP and UniBw
The Microeconomics of European Integration
(slides for Units 2, 3, 6 and 12)
Prof. Dr. Karl Morasch
Professor of Economics at UniBw
[email protected]
Note: Part 2 and 3 are based on the slides provided on the website of Richard Baldwin for the recommended textbook „The Economics of European Integration“ by Baldwin and Wyplosz
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
Institut für
Ökonomie und Recht
der globalen Wirtschaft
1
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
The Microeconomics of European Integration – Outline International Trade and Trade Policy
The EU as a Customs Union
Scale Economies and the Common Market
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
2
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Why do nations trade?
Comparative advantage due to different
• technologies (productivity) – Ricardo • factor endowments – Heckscher‐Ohlin
• preferences (taste)  autarky prices differ between countries
Product differentiation, economies of scale and imperfect competition
• more product variety (varieties of foreign firms) • lower average cost (more output due to larger markets)
• reduced markups (intensified competition) © K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
3
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Comparative advantage – Ricardo‘s example
England
Portugal
cloth (m)
10
12
wine (l) 1
6
production per
work week
production
shifting
(within country)
2 million weeks in
cloth instead of wine
cloth (m)
+20 Mio
‐12 Mio
+8 Mio
wine (l) ‐2 Mio
+6 Mio
+4 Mio
© K. Morasch 2014
1 million weeks in
wine instead of cloth
EU and the Euro crisis – The Microeconomics of European Integration
advantage
4
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Comparative versus absolute advantage
cloth
(million m)
input quantities:
6 million work weeks
in each country
production
possibilities frontier
of Portugal
72
60
production
possibilities frontier
of England
36
6
© K. Morasch 2014
wine
(million l)
EU and the Euro crisis – The Microeconomics of European Integration
5
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Factor endowments, factor intensity and trade structure
factor endowments
(capital per worker) technology
(relative factor intensity)
USA
Mexico
textiles
cars
$ 5000
$ 2500
labor
intensive
capital
intensive
specialization
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
6
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Comparative advantage in a general setting Differences in factor endowments, preferences and productivity yield different autarky prices Home
Foreign
q2 *
q2
A
U
A*
p1/p2
U*
p1* /p2*
q1*
q1
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
7
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Supply and demand schedule: Equilibrium and welfare analysis
p
S  MC
CS
Eq
p
PS
D  MU
q
© K. Morasch 2014
qEq
q
EU and the Euro crisis – The Microeconomics of European Integration
q
8
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
From autarky to free trade: Equilibrium determination
Foreign
Home
p
DS
p
X
DS*
pa
(eXport)
pFT
M
pa*
(iMport)
DD
DD*
q
© K. Morasch 2014
q
EU and the Euro crisis – The Microeconomics of European Integration
9
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
From autarky to free trade: Impact on welfare
Foreign
Home
p
p
DS*
pa
X
pFT
pa*
DS
A
C
B
D
M
DD
DD*
q
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
q
10
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Exchange rate influences trade volume and trade direction
Foreign (USA)
Home (EU)
DS(1€=1$)
p (in$)
p
DS*
pFT
paFT*
p
pa
X
M
DS(1€=0.5$)
X
pa
M
DD(1€=1$)
DD(1€=0.5$)
DD*
q
© K. Morasch 2014
q
EU and the Euro crisis – The Microeconomics of European Integration
11
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Analysis with trade costs
Foreign
Home
p
DS
p
DS*
pa
pdomestic
t
pFT
pborder
pa*
M
DD
X
DD*
q
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
q
12
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Trade policy instruments
• tariff: a tax on imported goods
• quota: restricts the number/value of imported goods
• voluntary export restraint (VER):
quota levied by the foreign government on exports
• technical barriers: bureaucratic restrictions, industry standards
• export subsidies: a subsidy payed on goods that are exported
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
13
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Impact of a tariff in a small country
DS
p
CS
–A
–B
–C
–D
pt = pworld+t
pworld
A
B
C
© K. Morasch 2014
qSt
Tariff
revenue
Total
+A
–B
+C
–D
D
Transfer:
A (rent)
C (tariff revenue)
Net loss:
B (efficiency of production)
D (efficiency of consumption)
DD
Mt
qS
PS
qDt
qD
q
EU and the Euro crisis – The Microeconomics of European Integration
14
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Equivalence of tariff and quota
p
DS
Sq = DS + Quota
pt = pq
pworld
A
B
C
D
Quota
= Mt
DD
q
qSt
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
15
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Optimal tariff: terms of trade effect for large countries
Foreign
Home
p
DS
p
DS*
pw + t
pwt +t
pw
pwt
tariff t
a
b
c
e
d
DD
Xt
DD*
Mt
q
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
q
16
Institut für
Ökonomie und Recht
der globalen Wirtschaft
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
The Microeconomics of European Integration – Outline International Trade and Trade Policy
The EU as a Customs Union
Scale Economies and the Common Market
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
Institut für
Ökonomie und Recht
der globalen Wirtschaft
17
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Different forms of discriminatory preferences
• discriminatory tariff reduction: tariffs are only reduced on goods mainly traded with partner countries
• preferential trade arangement: tariffs are reduced for partner countries but not for other countries
• free trade area:
tariffs eliminated between partner countries, individual external tariffs
• customs union:
no tariffs between partner countries and common external tariff
• common market:
unrestricted factor movements and elimination of frictional barriers
• economic union: common economic policy, e.g. EU competition policy or ECB
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
18
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Impacts of dicriminatory liberalization – basic effects
• Importing country I: trade creation
goods initially produced at home now traded with partner countries
• Importing country II: trade diversion
goods initially imported from third country now imported from partner country
• Positive impact on exporting member country:
sells a higher quantity at the domestic price of the importing member country • Negative impact on exporting third country:
sells a lower quantity at a reduced border price (terms of trade effect)
• Net effect for member countries depends on – relative importance of trade creation vs. trade diversion
– relative productivity of partner and third country in the case of trade shifting • Elimination of frictional barriers always positive for member countries
Third countries may win if not `rule of origin´ (e.g. introduction of the Euro)
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
19
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Impacts of a customs union – small importing country
p
DS
A+B+C+D: gain in consumer surplus
‐A:
loss in producer surplus
pworld + t
ppartner
A
B
C
D
‐C‐E:
loss of tariff revenue
E
pworld
DD
qSCU qSt
© K. Morasch 2014
qDt
CCU
‐E+B+D:
net impact ‐ may be negative due to trade diversion
q
EU and the Euro crisis – The Microeconomics of European Integration
20
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Import demand curve – derivation and welfare analysis
Home
Imports
DS
Price, P
Price, P
C: border price effect
E = B + D:
P2
import volume effect
P1
A
P0
B
E
C
D
C
D0 – S0
MD
DD
D1 – S1
= marginal utility
of imports
D1 – S1
Quantity, Q
© K. Morasch 2014
D0 – S0
Quantity, Q
EU and the Euro crisis – The Microeconomics of European Integration
21
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Export supply curve – derivation and welfare analysis
Foreign
Price, P
P1
A
B
C
XSF = MSH
DS*
S*2 – D*2
P2
Exports
Price, P
C
D
under free trade
foreign export supply
= home import supply
E
S*1 – D*1
C: border price effect
P0
E = B + D:
import volume effect
DD*
Quantity, Q
© K. Morasch 2014
S*1 – D*1 S*2 – D*2
EU and the Euro crisis – The Microeconomics of European Integration
Quantity, Q
22
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Joint diagram – foreign, import, and home
Foreign
World
Price, P
Home
DS
Price, P
Price, P
DS*
XSF
Pa
PFT
Pa*
MDH
DD
DD*
Quantity, Q
© K. Morasch 2014
Quantity, Q
Imports
EU and the Euro crisis – The Microeconomics of European Integration
23
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Large country tariff analysis in the MD‐MS‐Diagramm pborder
pdomestic
Welfare effects
MS with t
XS=MS
p’
pFT
t
p’‐t
Home:
+AB tariff revenue
‐ AC higher pdomestic
+B‐C net impact (?)
MS
A
B
C
D
pFT
Foreign:
‐(B+D) lower pborder
World:
‐(C+D) less trade MD
X’=M’
© K. Morasch 2014
Foreign
exports
XFT= MFT
M’
MFT
EU and the Euro crisis – The Microeconomics of European Integration
Home
imports
24
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Types of protection: an economic classification Euros
Who captures the rent?
• DCR, e.g. tariffs (home)
• FCR, e.g. VER (foreign)
• frictional (no one)
Net Home welfare changes for:
– DCR = +B ‐ C
– FCR = ‐ A ‐ C
– frictional = ‐ A ‐ C
Net Foreign welfare changes for:
– DCR = ‐ B ‐ D
– FCR = +A ‐ D
– frictional = ‐ B ‐ D
Note: foreign may gain from FCR!
MS
p’
pFT
A
C
B
D
p’‐ t
MD
M’
© K. Morasch 2014
Home
imports
MFT
EU and the Euro crisis – The Microeconomics of European Integration
25
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
MD‐MS‐Analysis with three countries – Free trade and MFN tariff RoW
Partner
pborder
pdomestic
pborder
MSMFN
MS
XSP
XSR
1
p’‐
Home
p’
t
2
PFT
t
MD
R’
X
© K. Morasch 2014
XR
RoW
Exports
XP’
XP
Partner
Exports
M’
EU and the Euro crisis – The Microeconomics of European Integration
P
R
M=X +X
Home
imports
26
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Discriminatory, unilateral liberalization – price and quantity changes
RoW
Partner
pborder
Home
pdomestic
pborder
MSMFN
MSPTA
XSP
XSR
MS
P’
P”
P”
T
P’‐T
P”‐T
Pa
1
T
MD
p*
XR”
RoW
Exports
XR’
© K. Morasch 2014
Partner
Exports
XP’ XP”
M’
Home
imports
M”
EU and the Euro crisis – The Microeconomics of European Integration
27
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Discriminatory, unilateral liberalization – welfare effects
RoW
pborder
Partner
pborder
Home
pdomestic
XSR
p’
p”
p”
p’ ‐ t
p” ‐ t
D
C
(p’ – t)
(p” – t)
E
B
XR” XR’
© K. Morasch 2014
RoW
Exports
Home:
A+B‐C
Partner:
+D
RoW:
‐E
A
XSP
XP’ XP”
Partner
Exports
MD
XR”
M’ M”
EU and the Euro crisis – The Microeconomics of European Integration
Home
imports
28
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Evidence: Impact of EU customs union formation
E E C -6
O the r 6 E urope
R e st of W orld
$1 00
100%
$ billion (current prices)
$ 90
80%
60%
40%
$ 80
EEC
T o t al im p o rt s
$ 70
$ 60
$ 50
$ 40
$ 30
$ 20
20%
$ 10
0%
$0
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
1960
1959
1958
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
1960
1959
1958
N ote: Left pan el sh ow s sh are of E E C 6’s im port from th e three region s. O th er E uro-6 are th e 6 countries th at
join ed th e E U by th e m id 1980s, UK , Irelan d, D enm ark, Spain, Portugal and G reece.
Source: T able 5, E xternal Trade an d Balan ce of Paym en ts, Statistical Y earbook, Recapitulation, 1958-1991,
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
Institut für
Ökonomie und Recht
der globalen Wirtschaft
29
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Analysis of customs unions and free trade areas
•
•
•
•
•
European integration involved a sequence of preferential liberalizations
Good 1
but all of these were reciprocal.
Partner
Good 2
Home
In our example this implies that both Home & Partner drop t on each other’s Good 1
Good 2
exports. Need to address the 3‐nation trade pattern:
Analysis is simply a matter of recombining Good 3
results from the unilateral preferential case
Good 3
‐ market for good 1: analysis is identical
RoW
‐ market for good 2: Home and Partner change roles
‐ market for good 3: no partial equilibrium impact
(negative terms‐of‐trade impact for RoW in general equilibrium)
In example no difference between CU and FTA (t is alreadey the same initially)
generally: to avoid `tariff cheats´, `rules of origin´ necessary in FTA! © K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
30
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Total welfare impact of a customs union formation
Euros
Euros
Changes for Home:
• Market for good 1:
A+B‐C1‐C2
A
XS
D2
• Market for good 2:
+D1+D2
p’
p”
D1
p’‐ t
C2
p”‐ t
C1
MD
B
• Net impact:
A+B‐C2+D2
(because D1=C1)
Partner impact identical (due to symmetry)
RoW loses
XP’
XP”
© K. Morasch 2014
Exports
P’
XR” X
M’
Imports
EU and the Euro crisis – The Microeconomics of European Integration
31
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Preferential liberalization of fricitional barriers
Euros
Euros
Changes for Home:
• Market for good 1:
A+F
A
XS
• Market for good 2:
+D
p’
F
p”
p’‐ t
D
MD
p”‐ t
• Net impact:
A+F+D
(no loss or gain of tariff revenue)
Partner impact identical (due to symmetry)
XP’
© K. Morasch 2014
XP”
Exports
P’
XR” X
M’
Imports
EU and the Euro crisis – The Microeconomics of European Integration
RoW loses
32
Institut für
Ökonomie und Recht
der globalen Wirtschaft
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
The Microeconomics of European Integration – Outline International Trade and Trade Policy
The EU as a Customs Union
Scale Economies and the Common Market
© K. Morasch 2014
Institut für
Ökonomie und Recht
der globalen Wirtschaft
EU and the Euro crisis – The Microeconomics of European Integration
33
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Market size matters
•
European leaders (e.g. Jean Monnet, Jacqes Delors) always viewed integration as a way of compensating for the small size of European nations.
Implicit assumption: market size is good for economic performance.
•
Facts:
‐ Even after customs union and free trade aggreement with EFTA there remained a lot of fiscal, physical and technical barriers that make it still easier to sell to local market.
‐ Single market program tries to eliminate or at least to reduce these barriers.
‐ European integration is associated with mergers, acquisitions, etc.
•
Economic logic:
liberalization  de‐fragmentation  pro‐competitive effect  industrial restructuring
RESULT: fewer, bigger, more efficient firms, facing more effective competition
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
34
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Basic concept: Monopoly pricing
Price
p*
D
MC
MR
x*
© K. Morasch 2014
Sales
EU and the Euro crisis – The Microeconomics of European Integration
35
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Oligopoly as monopoly on the residual demand curve
Price
Typical firm’s expectation of the other firm’s sales
p*
Price
Typical firm’s expectation of other the other firms’ sales
D
p**
RD
D
RD’
A
MC RMR
x* Duopoly
© K. Morasch 2014
2x* sales
A
RMR’
x**
Oligopoly (3 firms)
EU and the Euro crisis – The Microeconomics of European Integration
MC 3x**
sales
36
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
BE‐COMP diagram: Mark‐up and number of firms in equilibrium Mark‐up ()
mono
duo
BE (break‐even) curve
*
COMP
curve
n=2
n=1
© K. Morasch 2014
Number of firms
n*
EU and the Euro crisis – The Microeconomics of European Integration
37
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Derivation of the COMP diagram
Mark‐up
Price
p'
mono
A’
p"
duo
B’
D
Monopoly mark‐up Duopoly mark‐up B
MC
A
R‐MR
xduo
© K. Morasch 2014
COMP
curve
R‐D (duopoly)
n=1
MR (monopoly)
xmono
n=2
Number of firms
Typical firm’s sales
EU and the Euro crisis – The Microeconomics of European Integration
38
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Details of the BE diagram
Euros
Mark‐up (i.e., p‐MC)
Price
po=o+ MC
Demand curve
BE
A
ACo=po
o
po
B
A
B
AC
MC
n” no
Sales
per firm
Total
sales
Co
x”= Co/n” x’= Co/n’ n’ xo= Co/no
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
39
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Closed economy: Prices, output, and number of firms in equilibrium
Euros
Mark‐up
Price
Demand curve
E’
p’
BE
E’
p’
'
E’
AC
COMP
MC
n’ x’
© K. Morasch 2014
Sales
per firm
C’
Number of firms
Total
sales
EU and the Euro crisis – The Microeconomics of European Integration
40
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
From closed economy to integration equilibrium
Price
Euros
Mark‐up
Demand curve
(home market only)
BE
BEFT
E’
p’
E”
p”
E’
p’
p”
C
'
E’
E”
E”
A
pA
1
A
A
AC
COMP
MC
x’
n’ Sales
per firm
x”
© K. Morasch 2014
C’ C”
n” 2n’ Number of firms
Total
sales
EU and the Euro crisis – The Microeconomics of European Integration
41
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Economic logic behind the analysis in the diagram
•
Integration: no‐trade‐to‐free‐trade: BE curve shifts out (to point 1)
•
Defragmentation
– PRE typical firm has 100% sales at home, 0% abroad; POST: 50‐50 – can’t be seen in the diagram!
•
Pro‐competitive effect: Equilibrium moves from E’ to A – firms losing money (they are below BE)
– pro‐competitive effect = markup falls
– short‐run price impact p’ to pA
•
•
Industrial restructuring: A to E”
– number of firms: 2n’ to n”. – firms enlarge market shares and output, – more efficient firms: AC falls from p’ to p” – mark‐up rises – profitability is restored
Result: bigger, fewer, more efficient firms facing more effective competition
•
Welfare: gain is area C
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
42
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Motivation of EU competition and state aid policy
Immediate questions:
– “As the number of firms falls, isn’t there a tendency for the remaining firms to collude in order to keep prices high?” – “Since industrial restructuring can be politically painful, isn’t there a danger that governments will try to keep money‐losing firms in business via subsidies and other policies?” The answer to both questions is “Yes”. EU competition policy and state aid regulation adress these questions.
© K. Morasch 2014
EU and the Euro crisis – The Microeconomics of European Integration
43
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Subsidising firms to avoid restructuring Price
euros
Mark‐up
COMP
Demand curve
a
pA
d
pA
A
E’
E’
p’
AC
BEFT
b
A
A
c
MC
x’
xA= 2CA/2n’
© K. Morasch 2014
Sales
per firm
2n’ C’ CA
Total
sales
EU and the Euro crisis – The Microeconomics of European Integration
Number of firms
44
1. International Trade and Trade Policy
2. The EU as a Customs Union
3. Scale Economies and the Common Market
Institut für
Ökonomie und Recht
der globalen Wirtschaft
Economic integration under partial collusion
Price
Mark‐up
Demand curve
pmono
pB
BEFT
Perfect
A
collusion

mono
B
B
E”
E”
p”
n=1 CB
© K. Morasch 2014
n” nB
Partial
collusion
2n’
COMP
Number of firms
Total
sales
EU and the Euro crisis – The Microeconomics of European Integration
45