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A study on regulatory policies in the international telephone markets : theory and empirical evidence Ju, Heng


The provision of international telephone calls requires a settlement arrangement between countries in traffic exchanges. A call-termination charge, or "settlement rate", is paid from the call-initiating country to the terminating one. Around 1980, the U.S. government attempted to improve efficiency by unilaterally introducing competition into its domestic market, supplemented with rules on carriers designed to avoid an unfavorable position in settlement negotiations with other countries. In particular, the FCC required all U.S. carriers to act collectively when negotiating settlement rates with foreign carriers and apply a Proportional Return Rule (PRR) to share foreign settlement income in accordance with their market shares of outbound. The dissertation tries to evaluate the FCCs policies and identify the factors that can derive the market efficiency. Chapter 2 analyzes a scenario that competing carriers in a country jointly determine a uniform settlement rate for foreign incoming traffic. Under the PRR,, an increase in domestic competition reduces retail prices but also increases net settlement payments to other countries. Moreover, fixing the level of retail competition, the PRR cannot reduce retail prices, but increases the U.S.'s net settlement payments, contrary to the FCCs intent. Chapter 3 discusses two other scenarios. The first one is that carriers from two countries choose settlement rates in a cooperative fashion of Nash bargaining. The equilibrium settlement rate is lower than the one under non-cooperative regime. The second model, multiple routes relaxes the Uniformity requirement. When there are multiple routes to exchange traffic between two countries, or there is competition at the settlement services, the retail competition can steer the market outcomes toward the efficient level. Chapter 4 empirically examines the above theoretical predictions. I constructed a measurement of the intensity of the PRR for each international route in each year. I found empirical evidence that the rule did increase both the settlement rates and the net settlement payments made by the U.S. carriers. However, the rule's effect toward the retail price is unclear, possibly due to the model specification and the endogeneity issues. The empirical finding suggests that a multiple-route model matches the data better than the one with uniformity requirement.

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