Consider the model of international settlement rates between the North and the South analyzed in Section 5.3.3. Suppose now that the phone industry in country N is fully competitive, hence the price of an international phone call from N to S is pN =

a, where a is the negotiated access charge. Also, suppose that the phone industry in country S remains a monopoly, hence the price of a phone call from country S to N is pS = β. Answer the following questions.

(a) Formulate the profit function of each phone company as a function of

a, and conclude what level of access charge maximizes the profit of eachcompany.

(b) Using the bargaining rule of Assumption 5.4 on page 127, determine a mutually agreed upon access charge. Compare this access charge to the access charge agreed upon when both companies are monopolies. Explain why there is a difference.

(c) Calculate the net flow of money transferred from company N to company S. Compare to the amount transferred when both companies are competitive