Transactions on international markets for goods and services are affected by goals of sovereign nations about their own industrial and trade performances. These goals are pursued through the design of: a domestic regulatory and antitrust regime, a growth and innovation policy, and an international trade policy. In turn, trade policy results from international negotiations and treaties, governing access to domestic markets and tariff barriers, that may also limit the scope and discretionary power of both regulatory and industrial policies.
Trade in services is characterized by two main differences with respect to trade in goods: (1) international transactions in services more often entail some form of foreign direct investment (acquisition, joint venture or affiliation with an esisting company, or creation of a subsidiary), or vertical relation with local firms, than do transactions in goods, due to the fact that often the provision of a service in a foreign country requires the establishment of a point of presence in its territory; (2) government regulation of services industries often has intensity and scope rarely found in goods industries (Schott, 1990).
The peculiarity and the growing economic relevance of trade in services have led in the last Uruguay Round of the General Agreement on Tariffs and Trade (GATT) to the signature of a General Agreement on Trade in Services (GATS). This agreement defines principles and rules of conduct and includes a number of annexes on specific industries, among which telecommunications (GATT, 1992).
In this paper we implicitely refer to trade in new international telecommunication services, even if the proposed analytical framework could prove to be useful also for other services that can be traded across borders (long-distance services), such as, for example, banking and insurance. The main features of the modelled situation are the presence of: relevant indivisible investments in the design and construction of the service infrastructure; consequent scale economies in the service operation; intrinsically oligopolistic market structure where, often, differentiated services are provided through separate infrastructures; potentially global market segmented in sub-markets regulated at national level; need of international coordination (national regulation harmonization) to foster trade among countries.
To make the discussion clear throughout the paper we will use as reference example the provision of worldwide personal communication services with global international roaming and availability (i.e. possibility to use the service wherever and whenever). These new services will be based on innovative space infrastructures [probably, Low Earth Orbit (LEO) satellite constellations], expected to be built up for the end of the 90s, will have an international coverage, and will use scarce resources, as spectrum, allocated through a worldwide coordination process. However, they are regulated at the national level and could promote growth and innovation of national champions in the manufacturing industry. Lastly, these services will be supplied also in markets in which imperfect substitutes are already available or are going to be provided, as the GSM cellular service in Europe (Bonanzinga et al., 1993).
Our analysis starts from a well known result of the strategic trade policy literature: in an industry with domestic and foreign market power, intraindustry trade, made possible by bilateral admittance of foreign firms, is Pareto superior to bilateral protectionism, but opportunism may lead to an inefficient outcome. Assuming that each country's government would choose protectionism if it could take the other country's policy as given, it raises a prisoner's dilemma type of situation in which by acting unilaterally in what appears to be their best interest, governments fail to achieve the best possible outcome (Krugman and Obstfeld, 1991).
Then we point out that in regulated industries, as telecommunications, public agencies interventions go beyond the simple alternative between protectionism and free trade and takes into account performances of possible entrants in order to choose the most efficient industry configuration. In this case, local decisions of a national regulator may lead to inefficiencies deriving from discrepancies between local and global cost-benefit evaluations. For example, both bilateral protectionism and intraindustry free trade could be Pareto dominated by a single global service provision. Similar arguments have been used in the past to justify the monopolistic service provision by international satellite consortia (essentially among public telecommunications operators), such as INTELSAT or INMARSAT. In the new scenario of deregulated national markets, where the roles of the, possibly multiple, network service providers and of the regulator are distinct, a cooperative service provision is no longer justified, but a cooperative regulation is still worthwhile. Consequently, given behavioural assumptions upon firms, the structure of the international industry results from a game among national regulators that involve a policy coordination process and a bargaining process to share the benefits deriving from coordination. These regulators, as usually assumed in the strategic trade policy literature, take charge of the complexity of interactions among different national policy goals, possibly associating suitable weights to the components of a social welfare function (Helpman and Krugman, 1992).
In this framework our objective is to show as the solution of the regulators game depends, at least, on: utility functions of national consumers and quality of domestic substitute services; relative cost efficiency of national and foreign firms and effects of R&D result exchange among firms; foreign trade profit flows; spillovers of innovative activities on domestic industries. In particular, heterogeneity of national demands, pre-existence of differentiated services, and cost asymmetries among new service providers could make the liberalization of the access to markets no longer a Pareto efficient outcome.
The paper is organized as follows. In section 2, we describe the features of the case of interest in terms of actors, technologies and costs, market structures, and instruments available to public actors to pursue their possibly conflicting goals. In section 3, we discuss the effects of possible regulatory and trade policies in terms of viability of the innovative service, efficiency of the resource allocation, and fairness of benefit distribution. In section 4, a model of international oligopoly with markets segmented by national regulations is presented and the solution of the competitive game among firms is determined. This solution allows, in section 5, the comparison of market equilibria in the cases of competition and international cooperation among national regulators with different intervention instruments. Lastly, in section 6, we give a brief summary and conclusion.
Paper prepared for the "International oligopolistic service supply in regulated domestic markets"
ITS 10th Conference, 3-6 July 1994, Sidney