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

Byline: Jan Guldager JArgensen (1), Philipp J.H. Schroder (2) Keywords: real costs; tariff costs; industry concentration; market structure; integration Abstract: Economic integration has had ambiguous effects on industry concentration. The literature on the topic proposes various explanations for these empirical findings. This paper provides an additional theoretical argument. It shows that in a world of monopolistic competition, integration alone (modeled as a reduction of trade barriers) may exert opposing forces on industry concentration, depending on whether the barrier consists of real (frictional) or tariff costs. 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 a correspondingly higher concentration. Under a tariff barrier, the redistributed tariff revenue stabilizes industry profitability, resulting in more firms and a lower concentration. Author Affiliation: (1) Department of Economics, University of Southern Denmark, Campusvej 55, DK-5230, Odense M, Denmark (2) Aarhus School of Business and DIW, Berlin (3) Aarhus School of Business, Fuglesangs Alle 4, DK-8210, Aarhus V, Denmark Article History: Registration Date: 12/10/2004