European Integration: Strategic Market Research and Industry Structures

The paper is concerned with the impact of market research prior to integration, on the structures of noncompetitive industries in integrated economy. The analysis focuses on separated, single commodity, monopolistic markets with stochastic demand. Monopolistic firms are considered in dynamic multiperiod model, where intertemporal links are determined by expenditures on market research in a present period and benefits from this activity (i.e., smaller variance of the prediction error) in the future. Assuming that each firm maximizes its total discounted expected utility from profit in indefinite time, we show that the optimal market research strategy is stationary and depends on market size. Consequently, in the period following integration firms operating prior to integration in small markets (such as Slovenia, Czech Republic, Hungary or Estonia) are expected to have much less information about the integrated market than their competitors operating before integration on European market. This informational asymmetry may affect the structure of the industry in integrated economy. In the extreme case, the firm operating before integration in the small market can be ruled out from the integrated market.