We next turn to the issue of the size of the gains from liberalization of network related services. We characterize inter-country network service interactions as involving service delivery along a joined network, but in ways which, in principle, give each of the two governments in the origin and destination countries the power to tax the same transaction4. Phone calls made from, say, the US to India can be regulated or taxed by both governments as messages are either sent or delivered. We evaluate non-cooperative international retaliatory outcomes involving service barrier retaliation in this case, measuring the gains from liberalization by comparing free trade and non-cooperative Nash policy outcomes.
A cross country policy game in a service network reveals three key differences relative to the traditional Nash equilibrium tariff policy game in goods due to Johnson (1954) and Gorman (1957). One is the use of instruments (taxes) by both countries on each bilateral service flow; another is the absence of any restriction that two way service flows be balanced in value terms as the services do not involve any cross country payment (unless taxed by the other government). The third is that intercountry flows along networks can be, and frequently are, unbalanced (more calls from the US to India, than from India to the US). As a result, both governments can have an incentive to charge high taxes in the Nash equilibrium if they can make the first charge on the appropriate bilateral service flow. We find that relative to a non-cooperative Nash outcome, gains from liberalization of network related services are typically larger than gains from liberalization in goods trade in models made comparable in the sense that the service flow parameter values now apply to different goods instead of services.