Driving under the Influence Strategic Trade Policy and Market Integration in the European Car Industry

University dissertation from Almqvist & Wiksell International

Abstract: State policy intervention in the economy has been a ubiquitous phenomenon in history. Varying in form and intensity, it has had a profound impact on trade, welfare, international relations, and political and economic thinking. This thesis provides an inclusive analysis of policy action in the European car industry. It details its development, processes, nature, and content and presents the story against a backdrop of changing economic realities and progressing European market integration. It mainly covers the three decades between the years 1970 and 2000 which saw implementation of the most diverse policy measures; from those associated with the height of industrial activism of several European governments to those policy actions instituted by the Commission to make the European car sector compatible, at least in principle, with the Single Market. This thesis also presents an estimation of the effect of these policies by measuring the extent of deviation from the Law of One Price, i.e. price dispersion. Based on an original panel dataset for car prices in the four largest European markets (Germany, France Italy and the UK) relative to the reference market (The Netherlands), the evidence shows that price dispersion was most pronounced during the period of industrial activism while the progressing unification of the Community market was accompanied by discernible price convergence. Estimations also show that implementation of protective policy measures led to relative price increases in the relevant markets and general price divergence, while abolition of these policies was followed by relative price decreases and general price convergence.

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