An Analysis On Domestic Market Segmentation And Unification

Constructing a unified, open market system with orderly competition is the indispensable requirement of the establishment of socialist market economy system. The Reform and Opening-Up Policy has initiated the transition from planned economy system to market economy system. However, the establishment of nationally unified market is blocked by many obstacles, of which regional administrative monopoly is a major one. The domestic market segmentation resulted from regional administrative monopoly hampers the smooth operation of market system, neglects regional comparative advantage, impedes the nation-wide effective allocation of variable resources and the realization of scale economy, and finally becomes a major hindrance to unified economy. To further research this question, this paper explores extant literatures and current situations, analyzes the mechanism of the formation of domestic market segmentation resulted from regional administrative monopoly, and then measures the above segmentation. Through these efforts, this paper demonstrates the adverse impacts of regional administrative monopoly on the establishment of nationally unified market, and explores relative suggestions to realize market unification.In exploring the mechanism of the formation of domestic market segmentation, this paper is illuminated by financial power division theory, government competition theory, overtaking strategy theory, and promotion mechanism theory. And then, this paper finds that local government is a vital interest group and central government is another vital interest group in economic transition. Actually, with the distribution of financial power and affair power, the principal-agent relationship is formed between central government-the principal and local government-the agent. In the framework of principal-agent theory, this paper later researches the above mechanism from the following points of view: asymmetric information, interest conflict, content of principal-agent relationship and incentive mechanism. From the research, this paper realizes that, after the decentralization and interest concessions in late 1980s, interest conflict between central government and local government picks up; local governments occupy information advantage; local governments' financial ability and affair right are not matching; unreasonable incentive mechanism exists between central government and local government. The referred aspects greatly influence the behavior of local governments: they prefer self-beneficial strategies, highlight regional economic interests, protect local financial resources, and then protect local enterprises that can bring in financial revenue. Finally, regional administrative monopoly results in domestic market segmentation.In measuring domestic market segmentation, this paper uses the degree of market segmentation to indirectly reflect the distance from unified market. Based on the monopolistic competition model of trade introduced by Krugman(1980) , this paper calculates all-inclusive summaries of trade barriers—Border Effects, including distance, prices, economic sizes and other factors. As stated in the results, domestic 'Border Effects' in 2002 is 28.2(exp (3.34)), a little larger that that of 1997, which is 27(exp (3.30)); tariff-equivalent of border effects among Chinese domestic provinces is 51.8%, a little higher than that of 1997, which is 51%. It demonstrates that, although the expansion of provincial trade tariff is held back with the construction of unified market and entrance to WTO, the degree of domestic market segmentation resulted from regional administrative monopoly is still serious, and there is a long way to go to get national market unified.Based on the theoretical and empirical studies, this paper puts forward the following suggestions to address the domestic market segmentation problem and therefore realize market unification. Firstly, modify and optimize principal-agent relationship between central government and local government. To specify, interest conflicts and disparity of affair right and financial ability should be smoothed; information transferring channel should be redesigned; financial system reform and transfer payment system are to be deepened; performance assessment system should also be modified. Secondly, Promote reform of state-owned enterprises and realize separation of enterprise from administration. Thirdly, Perfect and implement relevant laws and rules, such as Antitrust Law and Anti-Unfair Competition Law, and then establish special management institution to take charge of the construction and operation of nationally unified market. Fourthly, Establish regional negotiation mechanism and mobilize the cross-region management institutions to manage regional general affairs, institute and implement regional development plans.