Turkey established a customs union with European Union in 1996 in accordance with the Association Agreement signed in 1963. The main aim of this study is to analyse the effect of that customs union on the market structure and pricing behaviour in the Turkish manufacturing industry for the period 1994- 2000. In other words, this study intends to test the pro-competitive effect of the trade liberalization
initiated by the customs union. For this purpose the price-cost margin equation of 12 manufacturing sub-sectors are estimated using import and export ratios with European Union countries and control variables. A second equation is estimated for concentration ratio index using trade ratios with EU countries as explanatory variables. The estimation method is panel data covering 8 years and 12 cross section units.
The estimation results show that the export and import ratios of trade with EU countries have a negative effect on the price-cost margin in the manufacturing sector. It is concluded that trade with union countries created a beneficial wealth and efficiency effect in Turkish manufacturing industry due to falling price-cost margins. Similarly, Herfindahl index equation estimation results indicate that increasing imports with union countries caused a decline in the concentration ratio for manufacturing
industry during the considered period. Therefore, it can be argued that increasing competition through raising trade volume with EU countries has had a significant effect on the changing market structure and pricing behaviour of the manufacturing industry.