LIBERALIZATION IN SERVICE NETWORKS: Simple Network Service Model 2

We use a utility function to describe the preferences of each household. In this, ST, the total number of calls made along the relevant network, enters multiplicatively with a constant Л6 which we, for now, take to be common to all individuals,
w6712-2
The subscript n refers to countries and the superscript h to households in a country; U is utility, G is consumption of goods, and S is consumption of network related services. ST is total consumption of network related services by all the households in the relevant network; the domestic network when networks are disjoint, or the international network when they are linked. In this formulation, the network externality impacts directly on household utility when there is an expansion in the service network to include both home and foreign countries.

We assume, for simplicity, that each household in each country receives a fixed share of the economy wide income
w6712-3
w6712-4
Demands for goods and services by each household are obtained from maximization of the utility function (3) subject to the household budget constraint (5).
As no direct trade in S takes place in this model, in equilibrium the market for goods and services clears in each country; i.e.
w6712-5
and arbitrage ensures the common price across countries for goods. In equilibrium, goods and services prices are thus such that country demands for goods and services match their domestic supply.
We can consider the effects of liberalization involving a joining of the two previously disjoint country service networks using this framework. In this case, the ST term in preferences refers to the combined service consumption across the two countries, rather than the two separate country service consumptions. As only the externality term in preferences changes, when liberalization occurs in this simple case there are no real effects from liberalization; prices and quantities of both goods and services within countries remain the same; only utility changes.