The Evolvement And Influence Mechanism Of Domestic Product Market Integration

This paper is intended to study the integration process of domestic market in transition economy. Regional market integration is the inherent requirement of economic development. In the integrated market, several firms among different regions pursue division of labor in accordance with comparative advantages, engage in regional specialized production, and extend the scope of regional market. Finally, many industries have increasing returns due to external economies, then getting concentrated. This process will feed on itself (Krugman, 1991). But the general mechanism is not running smoothly in China. At the end of the 20th century, economic reform characterized by decentralization mobilized local governments to develop local economy. At the same time, it also had prompted the local government to protect local economy through market segmentation, which is not conducive to economic development. As one of the deadly diseases in economic reform of our country, the issue of regional market segmentation has always drawn people's attention.In fact, the self-improvement of market mechanism and the growth of market force are able to drive domestic market to integrate inherently. However, the mechanism is distorted by market segmentation forces, so the role of the market force which can lead to market integration will be severely damaged. Market segmentation forces impedes the development of inter-regional trades, raises the transaction costs, hampers the inter-regional cooperation and division of labor, and hinders the formation of a unified domestic market. So Market segmentation force is the key factors of regional market integration process. This paper holds that the force leading to regional market segmentation and its changes depend on the local governments' strategy in inter-regional trade. Many factors can influence local governments' decision, such as the supervision of central government, the welfare of local residents and the profit of local firms. In the background of economic globalization, economic opening can change the decisive environment of local government, enterprises' behaviors and peoples' views, then impact market the integration process.Comparing with the existing literatures, the main innovation points of this paper are as follows:Referring to the theories of strategic trade policy and regional integration, it studies the mechanism of local government's decision and the effect of the decision on different domestic commodity markets integration in the view of jurisdiction interest motivation under closed economic conditions. Also it explains local governments how to select its strategy in the inter-regional trade in by welfare analysis in different conditions. Based on the perspective of international trades, it analyzes the influence of different factors on domestic market integration process under the opening economy by considering import and export.The research structure is the description of current situation firstly, model analysis secondly, and empirical study finally. The main contents are as follows:First of all, this paper describes the process of domestic market integration, and shows the complicated stage characteristics of the process. Overall, China's domestic market integration has been improving, and the process of market integration is fluctuant as the result of interaction between the market force and distorting force. Since reform and opening up, as the most important reason of impeding market integration, the regional administrative monopoly has led to the market segmentation. This force of segmentation is dynamic, and its content and forms changes over time. Central government takes the policy to promote the market integration, under the guidance and supervision of central government, local protectionism weakens. But it is proved that the market segmentation which is more difficult to observe than before still exists. All forms of market segmentation are divided into two categories, those are outflow barriers and inflow barriers. Because of those barriers, the costs of sales increase, and the prices of commodities are distorted. Apart from that, the regional administrative monopoly could promote the convergence of industrial structure and deepen regional economic conflicts.Second, in the closed economy, this paper refers to the theories of strategic trade policy and regional integration, and studies the mechanism of local government's decision in the inter-provincial trade, which plays an important role in the integration of domestic markets. The paper holds that local government has the motivation to improving the benefits of the region. Through the analysis of different markets, we find that local government would like to implement their market segmentation policy if the cost of implementing market segmentation policy is low. Especially, the local governments of those regions where industries and enterprises without comparative advantages are lack of competitivity have sufficient motivation to acquire short-term benefits through market segmentation and local protectionism. Besides, the paper verifies the motivation of government to implement market segmentation policy by comparing the welfare of residents and enterprises under different government decision.Third, this paper tries to study the inherent mechanism how relative factors affect market integration process under opening economy by introducing import and export. When two enterprises in different regions compete for exporting, the resistance of market integration is inversely proportional to margin preference of export, the cost of implementing market segmentation, and proportional to tariff of import country, transportation cost in inter-provincial trade. Compared with the study of the closed economy, the force promote domestic market to integrate is weakened when the cost of setting barriers in inter-regional trade is increasing. The reduction of margin preference impedes the integration of domestic market. When a foreign enterprise is in the competition with two domestic enterprises, the force of market segmentation is proportional to the potential demand for products, tariff, transportation cost of international trade and inter-provincial trade. And it is inversely proportional to the cost of setting inter-regional trade barriers. Comparing to the study in closed economy, the negative influence of potential demand for product, transportation cost in inter-provincial trade and the cost of setting barriers on domestic market integration weakens, and the effect of tariff, transportation cost in international trade and marginal cost of each enterprises on market integration strengthens.At last, this paper investigates the current situation of domestic trade, the degrees of domestic market integration, and influence factors which affect domestic commodity market integration by using statistic and econometric approaches. Using regional input-output table in 2002, it investigates the current situation of domestic trade and openness degree of regional market under open economy, finding that interregional trade scale is large in total, but its scale is relative small compared to China's huge domestic market, so there is still room for expansion. It measures the integration degree of domestic commodity market by using relative price index and describes its trends, finding that domestic commodity market integration degree improves over the past twenty years. It studies the effects of import, export and other factors on regional market integration degree. The result is that: (1) Import may hinder regional market integration; (2) The region which owns large export scale trends to promote market integration; (3) There is significant positive relationship statistically between GDP per-capital and degree of market integration; (4) The proportion of state-owned enterprises, distance of province-to-province has negative effects on the degree of market integration, and so on.