This section of the module covers:
Why is the Interconnection Price Important?
There is a consensus among economists and regulators that interconnection prices based on cost are most likely to lead to desirable outcomes. Measuring “cost” is challenging — there is no single correct interconnection price. However, if the interconnection price is set “too low”:
- Inefficient competitors may enter the market
- Entrants may look for opportunities to profit by purchasing services at low regulated prices and simply re-selling them, instead of developing innovative new product offerings
- Incumbent operators may not invest in the network or maintain its quality.
For many new entrants, interconnection is one of their largest costs. If the interconnection price is set “too high”:
- It will deter entry by efficient competitors
- In the case of two-way interconnection, carriers may concentrate on maximizing payments from other carriers, instead of focusing on providing services to retail customers
- Customers will be paying more than they need to.
Interconnection charges have generally been designed following either the paradigm of (1) revenue sharing or (2) interconnection usage charges. Revenue sharing means that the telecommunications operators involved in a call have agreed to share the revenues, on a percentage basis or some other agreed basis. They thus share the risk of billing disputes and bad debts. On the other hand, interconnection usage charges imply setting charges to compensate explicitly one operator for the costs imposed on him by the other operator’s use of his network to originate or terminate a call. The operator paying the interconnection usage charge "owns" the call and takes the risk of disputed and unpaid charges. In addition, retail charges may be in one currency and interconnection usage charges may be in another.
RELATED INFORMATION
Economic and Accounting Measures of Cost
Useful Economic Concepts