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Abstract
In this paper, we analyze the importance of regulation and market structure on the welfare impact of service trade liberalization. For this purpose, we incorporate an imperfectly competitive services sector that can take on various market structures into a standard CGE model for a small open economy.We assume that in the benchmark a domestic incumbent monopolizes the services sector. In the counterfactuals, the services sector is liberalized and a license is provided to a single foreign service provider. If regulations can enforce competition between the domestic and foreign firm, then the telecommunications market structure turns into a Cournot duopoly. If regulations are weak, then the domestic and the foreign firm can form a cartel. We apply our framework to analyze the welfare impact of telecommunications liberalization in Tunisia. We find that if regulation guarantees competition, Tunisia’s welfare can improve up to 1.7 percent. If a cartel is formed, however, Tunisia’s welfare can drop 0.15 percent. These results emphasize the importance of market structure and the regulatory environment on the success of telecom liberalization in Tunisia.