LIBERALIZATION IN SERVICE NETWORKS: The size of the gains 4

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Table 4 and its accompanying notes set out the details of how we have manipulated basic data to obtain a model admissible benchmark equilibrium data set for model calibration10. We use this for counterfactual equilibrium analysis in which we reduce the differential pricing in all regions between international and domestic calls by one half, and then perform sensitivity tests in order to assess the robustness of model results to alternative values of elasticity parameters in production.

Calibrating our two service model to the information in table 4 yields the calibrated model parameters reported in table 5. The share parameters in the demand functions are computed using income and price information applied to Cobb-Douglas demand functions, with the sum of share parameters constrained to equal one. Share parameters in the production possibility frontier are computed using information on the value of goods and two types of services produced, and the elasticities of transformation by region. Both sets of share prameters are dominated in their first component by GNP which is large relative to the service categories.

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Table 6 reports regional welfare benefits from liberalization in international network related services using this model specification, where the price differential in all regions between domestic and international phone rates is halved. Results show gains for all regions but in proportional terms these are comparable across the smallest and largest region, confirming the conjecture we offered earlier regarding the country division of the gains from liberalization in services and the difference relative to goods liberalization. Changes in the consumption of international service are also the largest in the smaller country.

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