Three essays on bill-and-keep payment mechanisms between communication networks

In many countries, the payment structure in the telecommunications market is based on the Calling Party Pays Principle (CPP), in which only callers pay for calls. Since the CPP model has been generally accepted, little attention has been paid to the fact that call-receivers benefit from the calls without having to pay, except in telecommunications studies in 1970s. This “call externality” has been examined recently in research dealing with the Receiver Pays Principle (RPP). In this paper, I study the interconnection between a regulated fixed-line network and competitive mobile networks. Previous literature says that, under the CPP regime, mobile networks have an incentive to charge monopoly access charges, the profits from which are used to attract their own subscribers. However, taking into consideration the receiver’s utility reduces the mobile networks’ incentive for above-cost access charges. I consider this phenomenon to be a welfare transfer from fixed-line users to mobile users. I show that the welfare transfer is reversed as mobile networks take into account the receiving-utility of their own subscribers. This reversed welfare effect increases with the size of the receiver’s utility. However, the market outcome is still inefficient because the mobile access charges are not sufficiently low given the receiver’s utility. These results urge the introduction of a different payment regime into the telecommunications market to incorporate call externalities and remove access market distortions. I show that by introducing a new regime, “Bill-and-Keep”, which includes a Receiving Party Pays system and no access charges, efficient allocation can be achieved. Proper meet-points corresponding to receiver’s utilities are required for the efficient allocation. Theoretically, if a regulator is able to collect information about the costs of networks and the receiver’s utility, an optimal Bill-and-Keep regime can be introduced to the economy. But, because it’s nearly impossible to obtain this information, two practical Bill-and-Keep regimes are suggested: Central Office Bill-and-Keep and Meet-Point Bill-and-Keep. They only require information about transport costs, which are relatively easy to detect. Using a example model, I examine the welfare effect of the practical Bill-andKeep regimes for a range of values for the receiver’s utility. I show that for a Bill-and-Keep regime to be superior to a CPP regime the receiver’s utility should be fairly large. When receiver’s utility is small, a practical Bill-andKeep regime might not provide better total surplus than a market-driven CPP regime.