LIBERALIZATION IN SERVICE NETWORKS: Introduction 2

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Country size and the per capita benefit of access to the other country’s network tend to offset each other in determining the division of the gains from liberalization, suggesting that the country gains from cross- border network service liberalization can be of similar (absolute) size. This is opposite to the case of trade in goods where the benefits of liberalization accrue disproportionately to the smaller country (in the limiting case, a small open price taking economy receives all the gains from its own trade liberalization).

We first construct an example in which the country gains from liberalization are of equal absolute size in the two countries (in money metric terms). We then show how it is possible to change preference and other model parameters so that larger gains accrue to the larger (rather than the smaller) country, or vice versa.

We also show how, in an alternative formulation with two types of network related services (international and domestic), it is possible to capture price based substitution effects between service categories. This allows us to model network related service trade liberalization as the removal of barriers to international services (which have cross-country network externality effects), rather than simply the joining of two disjoint networks. Using this alternative formulation, we again show that the absolute size of gains can be larger or smaller for the large (or small) country, depending upon the parameter specification used in the model.