International Telecommunications, Settlement Rates, and the Fcc

This paper models settlement arrangements between international telecommunication carriers. The FCC in the U.S. claims these arrangements cost U.S. consumers billions of dollars annually, largely to subsidize foreign carriers in low-income countries. Our model shows why income differentials between the U.S. and foreign countries lead to high settlement rates and retail prices, and allows us to consider the role competition plays in this relationship. These findings are tested empirically. Using data spanning 17 years and 167 countries, we find U.S. carriers pass on one-half of any change in settlement rates to retail prices, and income differentials play a significant role in settlement rate determination. We also find three components of costs (distance, population, and area) are important in determining settlement rates, although their importance has diminished substantially over time. Some implications are drawn for the FCC's recently proposed settlement rate caps, as well as for proposals for multilateral solutions