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Preferential Trade Agreements, Market Power, and Product Differentiation

Paul E. Jensen and Vibhas Madan
Journal of Economic Integration
Vol. 19, No. 1 (March 2004), pp. 162-181
Stable URL: http://www.jstor.org/stable/23000631
Page Count: 20
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Preferential Trade Agreements, Market Power, and Product Differentiation
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Abstract

Preferential trade agreements (PTAs) usually result in increased trade amongst member countries and lower prices within the PTA. Thus the markets are assumed to be ``more competitive'' because lower prices are taken to imply ``decreased market power'' due to a reduction in price-cost margins. In this paper we empirically examine the relationship between changes in market power and product differentiation within the context of a duopoly framework with restricted entry. Using industry level trade data from the EEC we show that the formation of a PTA may increase the market power of PTA-exporters and lower the market power of non-PTA exporters. In addition, we show that these market power are more pronounced for less differentiated products.

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