ICT adoption, trade composition and welfare

In a vertically related industry, the paper studies the decision to adopt costly ICTs (Information and Communication Technologies) in the intermediate goods sector and how it affects the pattern and composition of intermediate and final good trade for a developing country. We set up a simple oligopoly model with two input sellers and one final good producer in a domestic country with the possibility of cross-hauling trade with one foreign final good producer. In our model, an ICT adoption is a simultaneous move game between two input suppliers. When both adopt ICTs, marginal costs are reduced, and additionally, a positive network effect accrues to both. We find the existence of multiple equilibria for a specific range of fixed costs for adoption. Both the private and social interests in ICT adoption rise with the input trade. Moreover, it changes the composition of trade by encouraging more input exports. Simultaneous trade reforms at the input and final good markets boost ICT adoption and improve domestic welfare.