ISP Interconnection and Flat - Rated Internet Pricing

Flat – rated internet pricing is increasingly becoming the most common mode of dial - up access nowadays. However, the debate about whether ISP bound telephone calls should also be unmetered is still open. On the one side, consumers and ISPs complain about the high costs of telephone calls and demand unlimited local calling for a fixed monthly fee as in the U.S (or now in some European countries). On the other side, incumbent LECs complain about the investment they have to make to keep pace with ever increasing traffic and congestion without due compensation. The problem lies in the fact that, as it is always the case, both sides are probably right. This paper addresses an important issue on dial up internet access and pricing: The ISP’s model of interconnection with the incumbent LEC and its implications on market prices and welfare. To that end and assuming flat – rated internet pricing, several interconnection models are studied. Among the metered models, the termination and origination models (the “benchmark” metered models), the free internet model and the end user model. Among the unmetered models: The standard CLEC – terminating American model, the FCC’s newly proposed C.O.B.A.K model and the British F.R.I.A.C.O model. All arrangements are confronted with each other in terms of equilibrium ISP prices, welfare and consumer and producer surpluses generated. Within that framework the paper tries then to answer the question of whether and under what conditions unmetered telephone calling in addition to flat rated internet use is welfare enhancing. Conclusions and policy recommendations are drawn from the theory and some practical cases.