Market integration with regulated national champions: winners, losers, and cooperation

This chapter focuses on the impact of market integration in regulated markets. If the trade barriers are cleared, competition takes place at the supranational level and regulation acts at the national level. Efficient and competent firms benefit from market integration as they take this as an opportunity to expand their business and encourage efficiency in a competitive environment. Market integration may be welfare-reducing as it affects the budget constraint of regulated firms. The author further identifies and discusses how consumers, taxpayers, and firms get affected by this market integration. The author presents a model that reflects on the possibility of cooperation between regulators; this cooperation is a means through which to get away with globally suboptimal policies in which countries wish to pay transfers to inefficient national producers. The chapter offers a welfare analysis of the impact of integration in regulated markets. I first show that under complete information, competition is welfare enhancing if and only if the variable costs of the two firms are sufficiently different. The high-cost country benefits from a price reduction and the low-cost country from export revenues. When the costs are similar, the (negative) business stealing effect prevails. Competition is not very beneficial to consumers (small price effect), and it harms the national firm, and hence tax payers, through business stealing. Indeed market integration creates winners and losers in both countries: I thus identify and discuss the impact of market integration on consumers, taxpayers and firms. In particular, in the presence of asymmetric information, supranational competition produces nontrivial effects on the rent-seeking behavior of regulated firms. Competition is in general thought to put constraints on regulated firms and to limit their capability of capturing information rents. My analysis shows that this is not always the case and that the direction of the effects depends crucially on the stochastic distribution of the shocks on production costs.