wireless competition

The Sunday New York Times ran an article over the weekend that digs into the apparent madness behind cell phone and wireless mobile service pricing. Athour Saul Hansell eschews traditional economics and instead turns to behavioral economic insights to explain consumers’ seemingly irrational behavior when it comes to selecting cell phone plans:

Neither the cellphone companies nor their customers, as it turns out, always act in the rational way that economists might predict. Consumers often put immediate gratification and the avoidance of unpleasant surprises above their long-term interests. The companies, meanwhile, are trying to meet the sometimes irrational expectations of investors, who want growth without too much nasty volatility, even if their profits suffer.

The article cites several unintuitive examples of customers and wireless carriers acting “irrationally”:  consumers switching to costlier plans when given the choice of a discounted or variable-priced plan; carriers charging a flat fee for data services even though they are expensive to provide; and consumers’ unwillingness to shop for lowest cost-per-minute deals.

It would seem that consumers dislike having variable monthly cell phones bills. Hansell cites the example of Sprint’s 2004 “Fair and Flexible Plan” offering. Fair and Flexible was a two-tiered pricing plan in which customers would pay a flat $35 for the first 300 minutes per month, and then $2.50 per each additional block of 50 minutes. While this plan makes sense economically, customers didn’t warm up to it, and instead signed on to plans that are more typical of today’s offerings among the Big Four: a flat-but-higher monthly fee for a bigger basket of anytime minutes, plus overage charges. Compared to a more variably-priced contract, this pricing plan doesn’t result in the lowest possible per-minute charges, but consumers have revealed a preference for consistent monthly bills over variable, usage-based pricing.

On the sellers’ side of the equation, cell phone service providers have difficulty determining their per-unit costs. Customers vary in their average monthly usage, and what’s more, usage among individuals isn’t static from month to month either. Thus, it’s hard for the companies to accurately estimate their costs-per-minute. As a result, the business strategy employed is to try to get a consistent amount of money from subscribers every month, and to have enough subscribers to cover total costs. For example, it costs very little for a wireless carrier to transmit a text message, yet the big four carriers each charge $0.20 per message. At the same time, they each offer an “unlimited texting” plan for $10-$20 per month. Again, consumers have shown a preference for consistent billing, and have signed up almost en masse for unlimited texting plans.

For whatever reason, consumers have shied away from lower-cost mobile plan options in favor of higher flat fees and plans with perks when given the choice. Whether it’s because we’re all just risk-averse and hate wildly-varying bills, or we’re drawn towards extra goodies like unlimited texting or in-network calling, the best way to discern what consumers want is to look at what they’ve chosen in the past. While critics of the cell phone industry complain that the wireless industry isn’t competitive or that wireless providers don’t compete on price, this article explores that American consumers’ preferences have guided those companies to the pricing system we have today.