Review of Industrial Organization 14: 337–353, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
Vertical Integration in International
LIVIO CRICELLI, MASSIMO GASTALDI and NATHAN LEVIALDI
Department of Production, Systems and Computer Science University of Rome - “Tor Vergata” Via
di Tor Vergata - 00133 Rome, Italy
Abstract. The process of liberalization and privatization is drastically altering the links among in-
ternational telecommunications carriers. The model presented in this paper analyses the international
telecommunications market illustrating the effects of vertical mergers, under symbiotic production
conditions, when vertically integrated and unintegrated carriers coexist. The effect of competition is
analysed both in the ﬁnal market and in the intermediate one where carriers compete over tariffs to
get an appropriate distribution of proﬁts. In particular, the results show the relations between ﬁnal
market prices, intermediate tariffs and market dimensions and their implications on proﬁts.
Key words: International telecommunications, vertical integration, symbiotic production.
Over the last decade, regulatory reforms and technological progress have had strong
impacts on the telecommunications sector in most industrialized countries. The
globalization process of the international economy, with a rise in telecommuni-
cations intensity, is creating a growing demand for international telecommuni-
cation services (Antonelli, 1995). This is changing the functioning of interna-
tional telecommunication systems, traditionally based upon bilateral trade cartels
among the monopolists serving each national market. The increasing volume of
international calls and the corresponding growing number of carriers are moving
telecommunications from the traditional monopoly to a market with a growing
competitive pressure (Noam, 1994). The older scenario of telecommunication ser-
vices formed by state monopoly carriers is changing into a single conduit in which
there are different, exclusive, territorially competitive companies interconnected
In 1984, when the regional operating companies were separated from AT&T, the
deregulation process started in the USA. In the ensuing years, the U.S. telecom-
munications marketplace became an exceedingly competitive arena and strategic
alliances became a core feature of competitive strategy. The recent further deregu-
The authors would like to thank Prof. Shepherd and an anonymous referee for helpful comments