LIBERALIZATION IN SERVICE NETWORKS: Two Service Model

Liberalization in this case involves lowering barriers to international communication, and is reflected in reduced tax rates in all countries on purchases of international network related services. This form of services liberalization, unlike that considered in the previous section, generates relative price effects and, hence, quantity responses.
We use specific functional forms for this purpose; in this case a constant elasticity of transformation (CET) function to describe the transformation of endowments into goods and services, but now one which incorporates two service types S1 and S2 one of which is supplied domestically and the other internationally, i.e.
w6712-10
where Yn is the fixed resource endowment of county n, GtJ is goods production in country n, S’n is production of service type 1 in country n, and S2 is production of service type 2 in country n. ij\ ifn and rfn are share parameters in production, and cr is the country n elasticity of transformation.


w6712-11
w6712-12
Each household in each country again derives utility from consumption of goods, but now also from the two types of services. These households also receive externality benefits from the consumption of network related services by other households along both the home and international networks.
We again use Cobb-Douglas preferences for each household, but now of the
w6712-13
Here n superscripts and subscripts refers to countries, and the superscript h refers to the households within country n. U is utility, G is consumption of goods, and S1 and S2 are consumption of the two service types (domestic and international). As before, household utility increases when country service networks are more fully joined, but these effects now operate differently in the home and international markets./a