BenchmarkPolicyadoptedbyFCCin1997isagoodexample.7

Analternativeallocationruleisa xed-divisionrulewherebycarriersdeterminetheexactallocationofincomingtra cpriortotheirchoicesofretailprices.A xed-divisionruleremovesthepricedistortioncausedbyPRR.Therefore,theindustrypro tishigherthanthatunderPRR.Galbi(1998)andRieck(2000)questionthedesirabilityofPRRwhenthein owislarge.Sincethesettlementofforeignin owbecomesmorepro table,carrierswouldsettheretailpricebelowthemarginalcost(includingthesettlementratepaidtoforeigncarriers)paringthewelfaregeneratedbyPRRwiththeonebya xed-divisionrule,Ju(2004) ndsthatgiventhesamesettlementrate,thesocialwelfareunderPRRishigherthanthatundertheequal-sharingrule.Healsoshowsthattheindustrypro tunderPRRislessvariabletothechangesofsettlementratesthanundera xed-divisionrule.ThisexplainswhytheimplementationoftheBenchmarkOrderreceivedlittleresistancefromtheU.S.carriers.

CollusioninLocalNetworkCompetition.Inthecaseoflocalnetworkcom-petition,interconnectednetworkproviderscompeteforthesamesetofsubscribers.Armstrong(1998)andLa ont,ReyandTirole(1998a,1998b,hereafterLRT)pro-videabenchmarkmodeltoanalyzethisindustrystructure.Themainconcernistheriskofcollusionthroughaccesscharges.

Intheirmodels,twosymmetricnetworks,eachlocatedatanextremeofalinearcity,competeforconsumersalaHotelling.Giventhepricescharged,eachconsumersubscribestooneandonlyonenetwork.Consumersbene tonlyfrommakingcalls.Withthesamecallingcharge,theinboundandoutboundcallsareassumedtobebalanced.8Whentheretailpriceisuniform(orlinearpricing)andtheaccesschargeisreciprocal,itisshownthat,ifthepriceequilibriumexists,accesschargecanbeaninstrumentfortacitcollusion.Thetwonetworkscancollectivelychooseasu cienthighaccesschargeforo -netcallstorecoverthemonopolyretailprice.Priceunder-cuttingincreasesmarketsharebutalsoincreasestheaccesspayment.Whentheaccesschargeishighenough,thegainfromretailiso setbytheaccesspayment,andanydeviationfromthemonopolypriceisnotpro table.

Whentheretailpricetaketheformofatwo-parttari ,i.e.,asubscriptionfeeandausagefeepercall,however,LRT ndaneutralityresultofaccesscharge.The xedfeeisasubstitutefortheaccesschargeandismoree ectiveatextractingsurplusthan

TheBenchmarkPolicyimposesacaponsettlementratesininternationaltelephoneagreements.TheratecapsaresetbyFCC.Thepolicyintendstoreducethesettlementratesthatarenegotiatedbythetelephonecarriers.

8Balancedcallingpatternimpliesanygivensubscriberisequallylikelytocallanyothersub-scriber,regardlessofthenetworkthatthereceiverison.7