Efficient Inter-Carrier Compensation for Competing Networks when Customers Share the Value of a Call

Abstract:     
With competition in telecommunications markets networks must complete calls originated on competing networks. The payments for such "termination services" affect retail prices and therefore consumption of telecommunications. Regulators typically require the calling party's network to pay a termination fee to the called party's network equal to the terminating network's "incremental cost" of completing the call. I show that when both parties to a call benefit from it, they should bear the costs of the call in proportion to the value that they receive from the call. This implies that requiring two networks to exchange traffic at a single point on a bill and keep basis can generate efficient network utilization in cases where imposing all costs on the calling party's network will not. This occurs even with unbalanced traffic between the two networks. Thus, regulators may improve the efficiency of telecommunications markets by establishing inter-carrier compensation rules that cause the calling party and the called party to share the cost of a call.

Number of Pages in PDF File: 29

Keywords: Interconnection, Access Rates, Bill-and-Keep

JEL Classification: L43, L51, L96

working papers series