FCC Economists on Intercarrier Compensation

by on August 19, 2004

Some economic insight to the post by James on intercarrier compensation is found in a paper by Jay Atkinson and Chris Barnekov, senior economists at the FCC. Don’t let the weighty title of the paper distract you, “A Coasian Alternative to Pigovian Regulation of Network Interconnection” is based on a simple core concept – well-defined property rights. The paper explores what default rules might be appropriate for intercarrier compensation so that interested parties in the market, and not the FCC, can work out efficient resolutions. Earlier this week, the authors received the third annual FCC “Excellence in Economic Analysis” award for their work on this paper. Whatever the resolution regarding the reform plan recently submitted by the Intercarrier Compensation Forum, it will be analyzed in light of the Atkinson and Barnekov analysis. Their proposal:

“The rule is first to identify those facilities that are solely incremental to interconnection, then to split the cost of providing these facilities equally between the two carriers. Each carrier would recover these and all its other costs from end user customers, not from interconnecting networks. For several basic types of networks, we demonstrate below that this simple default rule results in efficient, competitively neutral interconnection. We argue that this result can also be generalized to more complex networks. We believe this rule provides a conceptual solution to the problem of interconnection between dissimilar networks in the presence of market power, and that it provides a default that can enable interconnectors to reach competitively neutral and, with respect to interconnection, efficient outcomes.”

And hey, you have to like any paper that begins with this quote from Ronald Coase:

“The kind of situation which economists are prone to consider as requiring corrective Government action is, in fact, often the result of Government action.” – R.H. Coase, 1960

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