Who Should Pay for Two-Way Interconnection?

Abstract

We analyze how termination charges aect retail prices when taking into account that receivers derive some utility from a call and when rms may charge consumers for receiving calls. We assume that consumers form expectations about network sizes in a passive, but ex-post rational way. We show that the receiver-pays regime enlarges the set of equilibria compared to the caller-pays regime. For a given termination charge and inelastic subscription demand, the receiver-pays regime allows rms to obtain higher prots at the expense of consumers. Socially optimal termination charges are below cost and lower under the caller-pays regime than under the receiver-pays regime. We also analyze elastic subscription demand. Total surplus, consumer surplus, and market penetration are all maximized by the same positive but below cost termination charge. Firms’ prots typically increase when the termination charged is removed away from