3. Market size and scale effects

Economics of the Single Market

the disadvantages of market fragmentation

reduced competition, which means higher prices, inefficient firms in the business, lower quality

integration / liberalisation / defragmentation process

defragmentation of the market → more competition → downwards pressure on prices → profit losses → industrial restructuring (least efficient firms go out of business, some firms merge → only big, more efficient firms are left → profit losses have been eliminated → prices have fallen, output has risen, overall employment has risen

Why governments interfere in the integration process

the restructuring process is costly and has friction - before the benefits of integration, people lose their jobs, so political parties responsible can lose popularity

How governments interfere in the integration process

preventing inefficient firms from disappearing e.g. by giving subsidies

How firms interfere in the integration process

anti-competitive practices e.g. collusion (collectively agreeing to charge higher markups so none have to go out of business)

How the EU ensures integration process is free of interference

the Commission enforces rules on state aid, rules on anti-competitive practices, and screens mergers to make sure they enhance efficiency

European air travel liberalisation

Europe liberalised air travel → large profit losses for European airlines → governments owned airlines, did not want them to merge or close down, used taxes to cover losses → airlines (Swiss Air & Sabena) cooperated by organising one plane along a route but named under both airlines → some airlines went bankrupt (Swiss Air & Sabena) → government created replacement airlines (Swiss & SN Brussels Airlines)

European banking liberalisation

banks anticipated the increased competition that would come from liberalisation → banks undertook mergers and acquisitions to avoid big losses → market liberalisation began → skipped the losses, immediately went to end result