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

FTC Bureau of Economics Working Paper No. 251

29 Pages Posted: 20 Jun 2003

See all articles by Patrick DeGraba

Patrick DeGraba

Federal Trade Commission - Antitrust I

Date Written: September 2002

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.

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

JEL Classification: L43, L51, L96

Suggested Citation

DeGraba, Patrick, Efficient Inter-Carrier Compensation for Competing Networks When Customers Share the Value of a Call (September 2002). FTC Bureau of Economics Working Paper No. 251. Available at SSRN: https://ssrn.com/abstract=402020 or http://dx.doi.org/10.2139/ssrn.402020

Patrick DeGraba (Contact Author)

Federal Trade Commission - Antitrust I ( email )

600 Pennsylvania Avenue, NW
Rm. 4249
Washington, DC 20580
United States
202-326-2855 (Phone)
202-326-3443 (Fax)

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