International Network Competition under National Regulation

We extend the workhorse model of network competition to international calls. This model enables us to show that national regulatory authorities (NRAs) maximizing domestic welfare have incentives to increase termination rates above the social optimum to extract rent from international call termination. Excessive termination rates distort prices but transfer surplus from foreign to domestic consumers via intensified network competition. The model can explain the regulation of termination rates through rate floors. International network ownership and deregulation are alternatives to combat the incentives of NRAs to distort termination rates. We identify conditions under which each of these policies increases aggregate welfare.