Pricing Implications of U.S.' International Settlements Policy

This paper investigates the impact of the U.S.' policy of “proportionate return of inbound traffic” (PRP) on the prices of outbound U.S. international calls. A quantity-setting model is used to reflect the strategic importance of quantity as a choice variable under PRP. With competitive U.S. carriers, the PRP reduces the total effective costs to U.S. carriers by preventing whipsawing of U.S. carriers by the foreign monopoly carrier—thereby lowering prices. But, the PRP is not effective in lowering prices if U.S. carriers collude. The analysis has important implications for the recent U.S. reform of the International Settlements Policy.