Fixed-to-VoIP Interconnection: Regulatory Implications of Asymmetric Termination Costs

The advent of Voice over Internet Protocol (VoIP) technologies has profoundly disrupted the economics of telecommunications markets, creating a new competitive dynamic between traditional fixedline incumbents and IP-based entrants. While incumbents benefit from entrenched demand-side advantages, including larger installed customer bases, established reputations, and consumer inertia, entrants deploying VoIP enjoy substantial supply-side advantages by leveraging more efficient network technologies and significantly lower call termination costs. This dual asymmetry — combining demandside strength for incumbents with cost-side advantages for VoIP—raises critical questions for regulators tasked with designing interconnection policies that preserve competition, promote market entry, and enhance consumer welfare. This paper develops a rigorous analytical framework to examine the regulatory implications of asymmetric and reciprocal termination charge regimes in such a mixed-technology environment. We construct a stylized model of retail and interconnection competition between a fixed-line incumbent and a VoIP entrant, incorporating two-part tariffs, heterogeneous consumer preferences, and cost asymmetries. The analysis explores both uniform pricing and price discrimination scenarios, allowing operators to differentiate between on-net and off-net call prices. We systematically evaluate how regulatory choices — including allowing VoIP to set termination charges above its marginal costs, imposing symmetric reciprocal charges, or moving toward a bill-and-keep zero-termination regime — affect equilibrium market shares, subscription and calling patterns, consumer surplus, and operator profitability. Our results demonstrate that regulatory decisions cannot be one-size-fits-all. Uniform cost-based regulation, though simple, may distort incentives, discourage entry, and erode welfare when cost asymmetries are significant. Conversely, asymmetric regulation that acknowledges VoIP’s cost advantage can promote entry but may adversely impact incumbents and consumers if competition is overly intense. Price discrimination is shown to mitigate many of the market share distortions associated with asymmetric costs. The findings underscore the need for nuanced, context-aware regulatory policies that balance the benefits of competition with the risks of excessive rent extraction and inefficiency. Policymakers should consider the specific market structure, degree of competition, and technological differences when designing interconnection regulation in evolving voice markets.