Goods market integration and border effects across European countries with a special focus on retail markets

• Applicant: Professor Dr. Günter Beck
• Subject Area: Economic Theory ; Statistics and Econometrics
• Term: from 2014 to 2017
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 239306994

The recent financial and debt crisis has renewed the political and academic interest in economic heterogeneity and divergence across member countries of the European Union (EU), and here in particular amongst those which have joined the European Monetary Union (EMU). While there exist various studies employing nowadays standardly used high-quality micro price data for examining the degree of integration across the United States (U.S.) and Canada, studies employing comparable European price data are either confined to very few goods (see, e.g., Fischer (2012)), very few locations (see, e.g., Engel and Rogers (2004)) or are of a mostly descriptive nature (see, e.g., European Commission (2011) or Kurkowiak (2012)). Having acquired access to a high-quality, multi-country European micro price data set we intend to fill this gap and obtain valuable new insights into the functioning of European goods markets. Issues that we will address in this context include an assessment of the integration efforts of EU countries conducted in the context of their Single Market strategy, a comparison of the importance of borders between EMU and EU countries and an assessment of the role which cultural affinities play for cross-country retail shopping.However, our contributions will not be confined to the use of new data, but we also intend to make several conceptual and methodological contributions to the existing literature. First, we will develop and implement an econometric model framework that will overcome the problem of internal consistency from which the most widely used approach to assess the importance of borders, i.e., the approach developed by Engel and Rogers (1996) (denoted by ER in the following) suffers. In addition, our chosen approach will allow us to examine the nature of competition between local European retail markets both within and across borders. More specifically, using a very flexible spatial econometric model and Bayesian model selection techniques, we will analyze to which extent competition across retail markets can be characterized either as being local or global and to which extent borders act as impediments to competition between markets.In our second major extension we intend to provide improved measures of the economic losses induced by borders. The most popular measure to evaluate the importance of borders at the moment (which goes back to the work by ER) not only suffers from its strong sensitivity to the obtained parameter estimates (and therefore often leads to unreasonable results) but also does not represent an economic welfare measure in a strict sense. Adopting newly developed econometric techniques from the fields of industrial organization and marketing to the purpose of our studies enables us to construct explicit economic cost measures of borders which are derived from estimated consumer preference parameters.

• DFG Programme: Research Grants
• Participating Person: Professor Jan Mutl, Ph.D.