Bilateral Market Structures and Regulatory Policies in International Telephone Markets

Abstract

We develop models of bilateral oligopoly with two-way traffic exchanges to study the impact of competition and government regulatory policies on the international telephone markets. When carriers in each country are required to act collectively in setting a uniform settlement rate for inbound traffic, the proportional return rule (PRR) inflates equilibrium settlement rates and neutralizes equilibrium calling prices, although a direct effect of the PRR is to lower domestic calling prices for fixed settlement rates. Both competition and the PRR tend to increase net settlement payments. The overall market efficiency can be achieved only when multiple channels are available for traffic exchanges. Using a panel of 47 countries that exchanged telephone traffic with the U.S. between 1992 and 2004, we test the effects of bilateral market structures and the U.S. government policies on calling prices and settlement rates and the empirical results support our theoretical findings.