The Revenue-Sharing Rule for Interconnection Charges*

Abstract

In this paper we explore the economic principle behind the revenue-sharing rule for interconnection charges. Our main finding is that symmetric firms can collude by splitting the revenues equally. We further characterize the optimal revenue-sharing ratio and discuss the relationship between optimal ratio and the optimal access price. We also show that the revenue-sharing rule can have the perverse effect of inducing a firm to raise its own costs in order to gain a higher share of revenues. JEL classification number: L11.

Reexamining the effect of the most-favored-nation provision in input prices on R and D incentives

“…DeGraba (2001) asserts that a positive access charge would cause a bias in favor of the technology with high marginal costs because the access charge reflects only the marginal cost. Kim and Lim (2004) argue that the revenue-sharing rule for interconnection charges may give a firm a perverse incentive to raise its own cost in order to grab a higher share of the revenues. Valletti and Cambini (2005) show that firms tend to collude by underinvesting in quality in a two-way interconnection model of telecommunications.…”