incumbents – small providers will be motivated to set their prices (even) higher than large ones8. This is the
opposite of normal monopoly behavior.
The European Commission has responded by taking steps that recognize the effects of the terminating monopoly.9 In
effect, National Regulatory Authorities (NRAs) in most Member States will be obliged to impose remedies – typically
including the imposition of cost accounting and cost-based termination fees – on most operators, including many
operators that historically were not subject to significant regulation.
This is an intrusive remedy, but it is not disproportionate to the magnitude of the problem. Indeed, things seem to be
moving in the right direction, if slowly – the Commission reports a distinct downward trend in termination rates.10
At the same time, the European regulatory framework was intended to achieve deregulation over time. The real problem
with the current European approach is that there is no exit strategy.
As previously noted, competition alone does not cure the terminating monopoly problem. How, then, might Europe eventually
move beyond cost-based termination fees set by the NRAs?
A number of recent papers11 have suggested that the U.S. system contains valuable clues. The U.S. system of call
termination has problems of its own, to be sure, but it has generated low call termination rates (zero in many cases)
without requiring regulators to explicitly set termination rates for all carriers.
In consequence, call termination rates for most calls in the U.S. are less than one U.S. cent per minute.12 These low
termination fees, have resulted in low marginal cost for domestic U.S. calls, which in turn has fostered a migration to zero
marginal retail price. Starting in 1998, wireless operators began offering nationwide “buckets of minutes” plans with no
roaming or long distance charges. More recently, the U.S. is witnessing a similar evolution among wired local telephony
One promising development that bears watching is the terminati