International Settlements: Rate Alternatives Overview Alternative Procedures
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Agenda International Settlements: Rate Alternatives Overview Alternative Procedures Modelling Approach Summary & Conclusions Network Economics & Finance James Alleman CITI, Columbia University ITP, University of Colorado Copyright © 1997, 1998, 2001, 2003, 2005, & 2006 James Alleman. An extension of James Alleman, "International Settlements: An Analysis of Rates," Communications & Strategies, Special Edition, IDATE, 2nd. Quarter, 1998, Montpellier, France and " International Settlements: A Time for a Change" James Alleman & Barbara Sorce Proceedings of the Global Network 97 Conference Calgary, 16 - 18 June 1997 All Rights Reserved. James Alleman Overview Columbia University & University of Colorado Accounting/Settlement Rates Accounting/Settlement Rates Mechanics of Settlements Recent Activities Settlement Rate Bilateral negotiation One-half of accounting rate International Telecommunication Union United States Government James Alleman Columbia University & University of Colorado James Alleman Mechanics of Settlements Columbia University & University of Colorado Telephone Revenues US $, SDRs, or Gold Francs Based on traffic differences (millions) $18,515 9.9% $93,281 50.0% 40.1% $74,766 International Domestic Toll Source: FCC http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/trends.html James Alleman Columbia University & University of Colorado James Alleman 1-6 Columbia University & University of Colorado International Revenue Non-facsimile facsimile, low estimate Telephone Revenues facsimile, high estimate addition $200 (millions) International Toll $7,000 Domestic $150 50.0% (billions) 10.0% $35,000 40.0% $100 $50 $28,000 $0 1975 1985 1995 Source: FCC http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/trends.html James Alleman Columbia University & University of Colorado James Alleman International Revenues, USA $20 Columbia University & University of Colorado International Revenues, USA Source: FCC International Trends Report, August 22,1996 & http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/trends.html $5 misc. $4 $10 (billions) (billions) $15 $5 resale PL $3 $2 $1 $0 1980 1982 1984 Misc. Resale of Telephone James Alleman 1986 1988 1990 Net Settlements, Telephone Net Revenue, PL 1992 1994 1996 $0 Net Revenue, Telephone 1988 Columbia University & University of Colorado 1990 James Alleman International Resale Revenues, USA 1992 1994 1996 Columbia University & University of Colorado International Settlements, USA Source: FCC International Trends Report, August 22,1996 & http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/trends.html $2,000 Source: FCC http://www.fcc.gov/ib/td/pf/account.html (4/99) $7 $6 Net Settlements Billions (billions) $1,500 $1,000 $500 $5 $4 $3 $2 $1 $0 1986 1988 1990 Misc. James Alleman 1992 1994 $0 1996 1985 Resale of Telephone 1987 1989 1991 1993 1995 1997 year Columbia University & University of Colorado James Alleman 7-12 Columbia University & University of Colorado Accounting Rates International Prices Source: FCC http://www.fcc.gov/ib/td/pf/account.html (4/99) $1.50 International Prices, 1985 $3.00 Prices to USA Price from USA Accounting Rates $2.50 $1.00 $2.00 $1.50 $1.00 $0.50 $0.50 1997 1999 U.K. Turkey Spain Sweden Norway Portugal Italy Japan Ireland Greece Iceland France Finland Canada Austria Switzerland 1995 Netherlands 1993 New Zealand 1991 Luxembourg 1989 Germany 1987 Denmark 1985 Belgium Australia $0.00 $0.00 Source: OEDC International Telecommunications Pricing Practices and Principles: A Progress Report, 1995 James Alleman Columbia University & University of Colorado James Alleman International Prices Columbia University & University of Colorado International Prices International Prices, Percentage Difference, 1985 International Prices, Percentage Difference, 1988 80% 60% 60% 40% 20% 40% 0% 20% -20% 0% -40% -20% -60% -40% James Alleman U.K. Turkey Switzerland Spain Sweden Norway Portugal New Zealand Netherlands Luxembourg Italy Japan Ireland Iceland Greece France Germany Finland Denmark Belgium Australia Belgium Finland Germany Ireland Japan Netherlands Portugal Sweden U.K. Austria Denmark France Greece Italy Luxembourg Norway Spain Switzerland Source: OEDC International Telecommunications Pricing Practices and Principles: A Progress Report, 1995 Austria Australia -80% -60% Source: OEDC International Telecommunications Pricing Practices and Principles: A Progress Report, 1995 Columbia University & University of Colorado James Alleman International Price Columbia University & University of Colorado Price Differences & Settlements Sources: OEDC International Telecommunications Pricing Practices and Principles: A Progress Report, 1995 & FCC International Trends Report, August 22, 1996 Price Differences & International Settlements International Prices, Percentage Difference, 1991 60% 0.40 40% 0.30 20% 0.20 0% 0.10 -20% 0.00 -40% (0.10) U.K. Switzerland Spain Sweden Norway Portugal Netherlands New Zealand Luxembourg Italy Japan Ireland Greece Iceland France Germany Finland Denmark Austria Belgium Australia -60% Settlements, 1988 Price Difference, 1988 (0.20) Canada France Germany Greece Italy Japan Netherlands Spain Switzerland U.K. Source: OEDC International Telecommunications Pricing Practices and Principles: A Progress Report, 1995 James Alleman Columbia University & University of Colorado James Alleman 13-18 Columbia University & University of Colorado Price Differences & Settlements Price & Traffic Differences Sources: OEDC International Telecommunications Pricing Practices and Principles: A Progress Report, 1995 & FCC International Trends Report, August 22, 1996 Price Differences & International Settlements % difference price % difference traffic (negative) 0.50 80.0% 0.40 60.0% 0.30 40.0% 0.20 0.10 20.0% 0.00 0.0% (0.10) -20.0% (0.20) Settlements, 1991 Price Difference, 1991 (0.30) -40.0% Canada France Germany Greece James Alleman Italy Japan Netherlands Spain Switzerland U.K. Austria Columbia University & University of Colorado James Alleman Price & Traffic Differences 54% 40% 33% 21% Japan Spain U.K. Columbia University & University of Colorado Interconnection Fees Sender-keeps-all Resale and Callback Negotiated/Flexibility Cost-based/Benchmarking 61% 20% Italy Alternative Procedures 80% 60% France 17% 0% -20% -34% -40% 0% 10% 20% 30% 40% 50% 60% R-square = 0.704 # pts = 6 y = 0.611 + 0.266(lnx) James Alleman Columbia University & University of Colorado James Alleman Observation Survey of the Literature Demand Analysis Asymmetry of Prices Models Policy Recommendations Accounting Rates are Intermediate/Interconnect Prices James Alleman Columbia University & University of Colorado Columbia University & University of Colorado James Alleman 19-24 Columbia University & University of Colorado Demand Analysis & Asymmetry Models: Policy Taylor, Lester, Telecommunications Demand Larsen, A. C. and Dale Lehman, Symmetrical Pricing and Arbitrage" Larsen, A. C., Dale E. Lehman, and Dennis L. Weisman, "A General Theory of Point-to-Point Long Distance Demand" James Alleman Johnson, L. L., Competition, Pricing, and Regulatory Policy in the International Telephone Industry Alleman, J. H., P.N. Rappoport, and K. B. Stanley, "Alternative Settlement procedures in International Telecommunications Service" Ergas, Henry. and P. Paterson, "International Telecommunications Settlements Agreements" Frieden, Robert., "International Toll Revenue: Tracking the Inequities and Inefficiency" Columbia University & University of Colorado James Alleman Columbia University & University of Colorado Models: Duopoly Models Hakim, S. R. a. and D. Lu, "Monopolistic Settlement Agreements in International Telecommunications Agreements" Competitive Benchmark Monopoly/Competitive Callback Yun, Kyoung-Lim, Hyun-Woo Choi and Byong-Hun Ahn, "The Accounting Revenue Division in International Telecommunications: Conflicts and Inefficiencies" Cheong, K. A.. and M. Mullins, "International Telecommunications Service Imbalances" James Alleman Columbia University & University of Colorado James Alleman Models (continued) Models: Competitive Competitive c1q1 First-best Cost-based prices Fifty-fifty split Sender-keeps-all (Bill-and-keep) James Alleman Columbia University & University of Colorado c0Q c2q2 q0: joint service (two-way) traffic qi: international service (one-way) traffic Q = q1 + q2 c0, c1, c2: average incremental costs and product specific (constant) marginal cost Columbia University & University of Colorado James Alleman 25-30 Columbia University & University of Colorado Models: Competitive Models: Competitive Prices: ai: settlement pi: international (collection rate), country i, i = 1,2 Cost-based Rates Efficient Benchmarking Improvement Inefficient Divergence international rates Fifty-fifty accounting rates "Sender-keep-all" (Bill-and-keep) First-best prices are marginal costs: p1 = c0 + c1 + c2 p2 = c0 + c1 + c2 Implies: a1 = c0 + c2 , a2 = c0 + c1, & p1 = p2 James Alleman Columbia University & University of Colorado James Alleman Columbia University & University of Colorado Models: Competitive Models Competitive Competitive Benchmark First-best Cost-based prices Benchmark improvement Fifty-fifty inappropriate Sender-keeps-all inappropriate Bill-and-keep inappropriate James Alleman Columbia University & University of Colorado James Alleman Models: Benchmark Columbia University & University of Colorado Models: Benchmark Price greater than Marginal Cost Factor max π = D (q) q - C(q) P > MC 12 thus 8 dπ/dq = [dD(q)/dq]q + D(q) - dC(q)/dq = 0 or 4 D(q) [1 + 1/η] = dC(Q)/dq 0 -1.10 -1.20 -1.30 -1.40 -1.50 elasticity James Alleman Columbia University & University of Colorado James Alleman 31-36 Columbia University & University of Colorado Models Models: Monopoly/Competitive Maximize: Competitive Benchmark Monopoly/Competitive π = Dm(qc, qm) qm + [Dc(qc, qm) - cc - co](qc - qm) - C(Q) James Alleman Columbia University & University of Colorado James Alleman Models: Monopoly/Competitive Models: Monopoly/Competitive Substituting: Specify demand as: Dm(qc, qm) = Dc(qc, qm) Columbia University & University of Colorado Maximize: α − β qm − γ qc π = = α − γ qm − βqc (α − β qm− γ qc) qm + [(α − γ qm− βqc) - cc - co](qc - qm) α, β, γ , > 0 and β2 > γ2 - cm qm - cm qc - cmqc - c0 qc James Alleman Columbia University & University of Colorado James Alleman Models: Monopoly/Competitive Models: Monopoly/Competitive Solving for first order conditions, rearranging and collecting terms: Solving using Cramer's rule: Let: ∆ = 3β 2 - 4γ 2 then 2(γ - β )qm + (β - 2γ )qc = cm - cc (β - 2γ )qm - 2β qc Columbia University & University of Colorado qm = [- 2β cm + (β + 2γ )cc + a(β - 2 γ ) ]/∆ = cc - α qc = [(2γ - β )cm - β cc + 2a(β - γ )]/∆ when co = 0 James Alleman Columbia University & University of Colorado James Alleman 37-42 Columbia University & University of Colorado Models: Monopoly/Competitive Models Competitive Benchmark Monopoly/Competitive Callback The ratio of γ 2/β 2 measures the degree of arbitraging the prices. We would expect to see γ 2 → β 2 over time. Initially γ 2 would be closer to zero since as γ → 0, the differentiation of the services is high and when γ 2 → β 2 the services become more substitutable namely, this ratio would measure the ease of arbitrage. [Shy, 1995, pp. 136 -7] James Alleman Columbia University & University of Colorado James Alleman Models: Callback Columbia University & University of Colorado Models: Callback pm = retail price or collection rate am = the settlement rate If pm - am < am or pm < 2am price $2.00 settlement ($1.06) net revenue $0.94 monopoly gains from callback James Alleman Columbia University & University of Colorado James Alleman Models: Callback No Callback price Models: Callback Callback price $2.00 settlement ($1.06) $1.06 net revenue $0.94 $1.06 $2.00 settlement ($1.06) $1.06 net revenue $0.94 $1.06 James Alleman Columbia University & University of Colorado Columbia University & University of Colorado James Alleman 43-48 $0.12 Columbia University & University of Colorado Models: Callback, Monopoly Models: Callback, Competitive No Incentive to Reduce Accounting Rate Settlement Improved Demand Stimulated Consumers/Producer Gain Trade Balance Deteriorates Neutral on Accounting Rate Settlement Exacerbated Demand Stimulated Consumers Gain James Alleman (via trade effects) Columbia University & University of Colorado James Alleman Models Policy Recommendations/Summary Competitive Benchmark Monopoly/Competitive Callback James Alleman Cost-based Prices Confirmed Benchmarks - Improvement Far from marginal costs Could be tighten Columbia University & University of Colorado James Alleman Policy Recommendations/Summary Columbia University & University of Colorado Future Research Cost-based Prices Confirmed Benchmark - Improvement Callback Ineffective (in some cases) Inappropriate Refine Models Estimation of demand functions Inclusion of callback/benchmark Ramsey pricing of settlements Estimation Sender-keep-all (Bill-and-keep) Fifty-fifty split Value-based pricing James Alleman Columbia University & University of Colorado Callback effects Benefits of cost-based settlements Developing country losses Columbia University & University of Colorado James Alleman 49-54 Columbia University & University of Colorado
