Market size and scale effects

Question 1

Schematic impact of market size and reduction of intra-EU barriers

Answer 1

Liberalization → defragmentation → pro-competitive effect → industrial restructuring (overall industry performance improves)

Question 2

BE-COMP curve

Answer 2

• COMP curve: imperfectly competitive firms charge a price that exceeds their marginal cost; the COMP curve illustrates the relationship between mark-up (μ) and the number of firms
• BE curve: the break-even curve illustrates that more firms will be able to survive if the price is far above marginal cost, i.e. if the mark-up (μ) is high

Question 3

Impact of European liberalisation

Answer 3

• the no-trade-to-free-trade liberalization results in fewer, larger firms
• the resulting scale economies lower average cost and thus, make these firms more efficient
• extra competition ensures that these savings are passed on to lower prices
• consumers in the trading countries have access to a larger amount of product varieties