DP233 | Completing the Internal Market in the European Community: Some Industry Simulations

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This paper studies the effects of changes in the internal market of the European Community in a partial equilibrium model of imperfect competition with economies of scale. The model is numerically calibrated to data on ten industries and the effects of two types of policy change are simulated. The first is a reduction in intra-EC trade barriers equivalent to a reduction in implicit tariffs by 2.5 percentage points; the second is the elimination of firms' ability to price-discriminate between different national markets. Sensitivity analysis of alternative ways of modelling firms' behavior suggests that the results are reasonably robust. The simple reduction in intra-EC trade barriers generates modest welfare gains, but much more substantial gains are associated with integration of national markets into a single European market.