chapter  6
10 Pages

Country specificity of communications networks

Over the past decade, communications networks have come to play a crucial role in economic activities in the world economy. Communications networks are the facilities through which different parties communicate with each other. Traditional examples include postal and telecommunications systems; more recent examples of communications networks are the Internet and related networks, satellite communications systems, mobile telephone networks, etc., which have raised international business transactions to a new level. As technology progresses, the quality and scale of the communications infrastructure within a country, and the number and sophistication of people using that infrastructure, become ever more crucial factors determining the performance of the country’s economy.2 Moreover, differences between countries in these characteristics of quality, scale, participation, and sophistication seem to influence the structure of the countries’ comparative advantages. Evidence of this includes the strong showing of the US economy, which is currently equipped with the most sophisticated communications networks in the world. Despite these facts, in the existing literature on international trade there has not been a model that captures the role of country-specific communications networks in determining the comparative advantages of countries. This study develops such a model. Harris (1995) was perhaps the first to investigate the role of a communications network in international trade.3 However, his focus was on the case in which all manufacturers of traded goods in the world used services provided by a single communications network industry that was not countryspecific, but conducted its business in all the countries. This chapter, in contrast, focuses on the role of country-specific communications networks and examines their influence on the determination of comparative advantage. For this purpose, the chapter builds a two-country model of monopolistic competition with a single production factor. The model has two types of good. The first type is a homogeneous good, the production of which does not require communications network services. The homogeneous good, which I call the non-network good, is supplied competitively. The other type consists of differentiated products that are supplied by monopolistically competitive firms. I call

these network goods. Each country has its own communications network industry. A country-specific communications network is available to all firms in the network goods sector and its construction requires a large fixed cost. Following Harris’s treatment, I assume that average cost pricing is adopted in the communications network industry. On the basis of the model outlined above, this study demonstrates that the size of a country, measured by the size of its endowment of the factors of production, determines its comparative advantage; that is, the larger country has a comparative advantage in the network goods. This is because the average cost of network construction can be reduced by an increase in the endowment of a country’s factors of production. The study also demonstrates that technological progress in the communications network industry stimulates international trade. This result is similar to what Harris observes in his model. However, Harris’s model is not suitable for the determination of comparative advantage. The main result of this chapter, which captures the relationship between a country’s size and the structure of its comparative advantage, has not appeared in the existing literature. The structure of this chapter is as follows. The following section presents the basic model. Trade patterns are considered in section 6.3. Section 6.4 deals with the question of trade gains, and concluding remarks are presented in section 6.5.