2.1.3 Market Size • Increasing Market Size

Academic Research paper and Study of the Economy of Romania and Romanian Business

Gains from trade according to points 3 to 5 are fostered by an increasing market size itself. Following Robson (2000: 83ff.) an increasing market size will lead to more competition and reduce market segmentation, thus overcoming the issue of imperfect competition. This is because merging markets will decrease the share of an enterprise in the home market but increase its share in the formerly foreign markets via the easier access.

Increasing Market size fosters competition

Thus, firms in the un­ion are forced via the increasing competition to lower their profit rates in favor of the customers, which enjoy lower prices. Then again, firms might be compensated by an overall expanded market allowing economies of scale. With increased market size production can be enlarged, this way reducing average production costs. Further cost reductions can be achieved by plant specialization, while the trade expansion and different tastes among regions foster an increasing product diversity. Taking these notions into account, not only the reasons for IIT and its benefits are explained but some further insights in the advantages of union enlargement are gained. However, as prerequisites for IIT similar production structures and – to some extend – tastes (demand patterns) are required. Some distortions on domestic markets such as local taxes on production might favor the demand for foreign products. But, in general, most market distortions are barriers to trade, thus decreasing market size and hampering the gains from trade.

However, trade and specialization might produce mutual gains but these have not to be evenly distributed; nor among the countries, neither within the countries. This issue is by far more obvious, when it comes to factor movements. The mechanisms involved are rather the same.