This paper investigates the impact of the U.S.' policy of "proportionate re
turn of inbound traffic" (PRP) on the prices of outbound U.S. international
calls. A quantity-setting model is used to reflect the strategic importanc
e 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 lowerin
g 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, refor
m of the International Settlements Policy.