LIBERALIZATION IN SERVICE NETWORKS: Introduction

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Here we discuss the cross border liberalization of flows of network related services such as telecoms, suggesting that both the division of the gains from liberalization between countries and the size of such gains is likely to be different from the case of trade in goods when tariff barriers are removed at the border. In the network related services case, no cross border payment for services is made since senders (callers) pay fully for services (messages), but cross border welfare effects of liberalization still occur. As prices for international calls are lowered, both senders and receivers of messages (calls) benefit. The addition of a new subscriber to a network confers an externality on existing subscribers who receives calls at no charge, since callers pay the full cost of calls. We model such effects as generated by preferences in which individual utility is a function not only of their own consumption of network related services, but also the consumption of others within the network. We then examine the effects of liberalization across country networks. We make no explicit reference to the sharp reduction in international call rates in recent years, even though these are a key part of the environment within which liberalization is now occuring.

We first consider a simple two good two-country case involving network-related services and other goods, in which the two countries have different numbers of consumers. If we model liberalization as the joining of two previously disjoint country networks into one combined cross country network, consumers in the smaller country receive a larger per capita gain than those in the larger country due to the network externalities, since these arise from gaining access to a larger network.