Trade Negotiations in the Presence of Network Externalities
Network externalities exist when the benefit a consumer derives from a good or service depends on the number of other consumers using the same good, or service (as happens, for example, with telecommunications, television broadcasting standards, an...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/04/437743/trade-negotiations-presence-network-externalities http://hdl.handle.net/10986/18835 |
| Summary: | Network externalities exist when the
benefit a consumer derives from a good or service depends on
the number of other consumers using the same good, or
service (as happens, for example, with telecommunications,
television broadcasting standards, and many other
technology-related goods and services). National monopolies,
regulated and endorsed by sovereign governments, tended to
produce network externalities in the past: most countries
had telephone monopolies, often state-owned, before
deregulation. Whether to allow foreign competition in such
industries becomes a pressing issue when national boundaries
begin to blur as technology advances, and as previously
untraded goods and services become tradable. Despite obvious
gains from trade in such newly tradable sectors, governments
often keep trade-prohibiting measures. With analog high
definition television (HDTV) transmission standards, for
example, regulations and politics kept Europe, and Japan
from cooperating, so each invested heavily to develop its
system in an attempt to have its own standard adopted by the
rest of the world. The author analyzes how the presence of
network externalities affects a country's willingness
to trade. In her model, governments decide whether or not to
allow international trade. When trading is permitted, the
superior standard drives out all other in the trading area.
She shows that even when there are efficiency gains from
worldwide standardization, global free trade may not
prevail. The technology leader is generally eager to trade,
but countries with less advanced technology often choose to
form inefficient regional blocks, or not to trade at all.
Once such regional networks are established, global
efficiency-enhancing free trade becomes even harder to
achieve than it would have been in their absence. Transfer
payments between countries reduce or eliminate such
inefficiency, and facilitate the achievement of efficient
trade in products. To achieve mutually beneficial
arrangements, it is important to arrive at multilateral
agreements before regional blocks form. |
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