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Efficient Intercarrier Compensation for Competing Networks When Customers Share the Value of A Call

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  • Patrick Degraba
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    Abstract

    In competitive telecommunications markets each carrier relies on competing networks to terminate internetwork calls. 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, effectively imposing all of the costs on the calling party's network. These payments can affect retail prices and therefore consumption. I show that when both parties benefit from a call, they should bear its costs in proportion to the benefit they receive. Therefore, imposing all of the costs of an internetwork call on the calling party's network can be inefficient if these costs are reflected in the calling party's usage rates. A system in which two networks exchange traffic at specified points on a bill-and-keep basis imposes some of the cost on each network, which will then be imposed on the parties. This can generate more efficient network utilization, even with unbalanced traffic between networks. Thus, regulators may improve the efficiency of telecommunications markets by establishing bill-and-keep intercarrier compensation rules. Copyright (c) 2003 Massachusetts Institute of Technology.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

    Volume (Year): 12 (2003)
    Issue (Month): 2 (06)
    Pages: 207-230

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    Handle: RePEc:bla:jemstr:v:12:y:2003:i:2:p:207-230

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    Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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    Cited by:
    1. Harbord, David & Hoernig, Steffen, 2010. "Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger)," MPRA Paper 21515, University Library of Munich, Germany.
    2. Berger, Ulrich, 2005. "Bill-and-keep vs. cost-based access pricing revisited," Economics Letters, Elsevier, vol. 86(1), pages 107-112, January.
    3. Sjaak Hurkens & Ángel Luis López, 2010. "Mobile Termination and Consumer Expectations under the Receiver-Pays Regime," Working Papers 10-12, NET Institute.
    4. Basalisco, Bruno, 2012. "The effect of user interaction on the demand for mobile text messages: Evidence from cross-country data," Information Economics and Policy, Elsevier, vol. 24(2), pages 132-144.
    5. Dewenter, Ralf & Kruse, Jörn, 2010. "Calling party pays or receiving party pays? The diffusion of mobile telephony with endogenous regulation," DICE Discussion Papers 10, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. Luis López, Ángel, 2011. "Mobile termination rates and the receiver-pays regime," Information Economics and Policy, Elsevier, vol. 23(2), pages 171-181, June.
    7. Ulrich Berger, 2004. "Access Charges in the Presence of Call Externalities," Industrial Organization 0408009, EconWPA, revised 31 Aug 2004.
    8. Hermalin, Benjamin E & Katz, Michael L, 2006. "Customer or Complementor? Intercarrier Compensation with Two-Sided Benefits," Competition Policy Center, Working Paper Series qt9vf0k91t, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    9. Harbord, David & Pagnozzi, Marco, 2008. "On-Net/Off-Net Price Discrimination and 'Bill-and-Keep' vs. 'Cost-Based' Regulation of Mobile Termination Rates," MPRA Paper 14540, University Library of Munich, Germany.
    10. Littlechild, S.C., 2004. "‘Mobile Termination Charges: Calling Party Pays versus Receiving Party Pays’(original and revised versions)," Cambridge Working Papers in Economics 0426, Faculty of Economics, University of Cambridge.
    11. Cunningham, Brendan M. & Alexander, Peter J. & Candeub, Adam, 2010. "Network growth: Theory and evidence from the mobile telephone industry," Information Economics and Policy, Elsevier, vol. 22(1), pages 91-102, March.
    12. Ulrich Berger, 2004. "Bill-and-Keep vs. Cost-Based Access Pricing Revisited," Industrial Organization 0408002, EconWPA.

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