Where Have All the Minutes Gone? Asymmetric Telecom Liberalization, Carrier Alliances, and Gaming of International Settlements

Inflated retail prices and termination rates for international telecommunications have spawned traffic re-routing practices, including call turnaround (e.g., callback) and re-origination via third countries. The US and other liberalized countries that allow telecom competition favor such practices, as undermining foreign monopolists. This view is seriously incomplete; re-routing practices ultimately may favor monopolists. Specifically, we show the following: (1) Re-routing practices, especially turnaround, can help foreign monopolists-allied with carriers in the US (or other liberalized markets)-to divert termination payments from nonalliance carriers by gaming the International Settlements Policy; the ISP aims to bolster competitive carriers in dealing with monopolists, by requiring equal termination rates at both ends and "proportional return" (traffic from the monopolist is terminated by US carriers in proportion to their shares of traffic to that country, not at the monopolist's discretion). (2) Gaming the ISP harms not only other carriers but typically also callers. (3) Proportional return creates distortions even without foreign gaming: it penalizes larger carriers; and because of it, callback from the US can reduce US welfare even when callback is motivated by "innocent" arbitrage. We present a simple linear-pricing alternative to the ISP that eliminates these distortions, yet benefits both countries.