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Nov. 17 2009 - 2:47 pm | 52 views | 1 recommendation | 4 comments

Confusopoly?: Cell Phone Edition

3 cell phone calls

Image by Wonderlane via Flickr

This weekend, the New York Times took a look at an issue near and dear to all of our hearts: cell phone contracts. I haven’t sweated over mine for a while — I forced my wife to get a new phone so we could get on an AT&T family plan, she hates the phone, and now I try to change the subject whenever consumer electronics come up — but most of us have spent a bad few hours on such an activity at least once every couple years.

The simplest answer, it’s always seemed to me, is that these contracts are a classic example of what Scott Adams has termed a “confusopoly” — that is, what happens to a market when firms can’t compete on price, or even really on quality, so they just have to try to confuse you into buying their product. Have you read the options on a cell-phone company Web site recently? Right, case in point.

Sure, different companies have different phones (who would use AT&T without the iPhone?). But, mostly, everyone has their particular minutes configuration and everyone claims to have the awesomest network in the known universe. So, unless you’re after a particular phone, how do you pick a carrier? And once you have a carrier, how do you pick a plan?

Bizarrely, according to the Times story:

Those high charges for going over your allotted minutes, for example, are designed to cause you enough pain that you will switch to a plan with a higher regular fee.

“You give people a really good bargain on this bucket of minutes,” explained Roger Entner, a senior vice president for telecommunications research at Nielsen. “People are risk averse, so you have a relatively high overage charge, which gets people to overbuy. You also get really predictable revenue out of it, which Wall Street loves.”

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.

Here are a few other examples of how the dance between cellphone companies and their customers is, to use Professor Nalebuff’s term, “weird”:

• When Apple and AT&T started offering the iPhone for $199, plus $30 a month for Internet access, sales shot up, even though the previous deal — $399 for the phone and $20 a month — cost less over a two-year contract.

• Phone companies have doubled the price for text messages, to 20 cents each, in recent years, even though they cost almost nothing to deliver.

• When companies introduce certain discounts — like Sprint’s recent offer of free calling to any mobile number — the effect is that customers often switch to more expensive plans.

• One thing that is costing cellphone companies a lot of money to provide is the one thing they offer for a flat rate with no limits: surfing the Web on gadgets like the iPhone.

Why are people behaving like this? It seems our main method of picking cell phone plans is to avoid surprises. We’d rather pay $30 a month extra for more minutes than subscribe to the cheaper plan and have $35 dollars of overage one month, $17 the next, and $20 the next. Of course, you’d come out ahead taking the overages, but you’d feel the pain of an unexpectedly higher bill each month — and you might even feel constant stress about whether or not you were about to go over.

And how do consumers react when companies try to offer more rational plans?:

In May 2004, Sprint answered the growing complexity of cellphone plans with a much more straightforward approach. Its Fair and Flexible plan offered 300 minutes for $35, and each additional block of 50 minutes for $2.50. It was a plan that an economist could love.

Unfortunately for Sprint, customers hated it because their bills varied a great deal from month to month. ”Nobody thinks about getting the lowest cost per minute,” said a former pricing executive for Sprint who asked that his name not be used to avoid offending his former employer.

Sprint dropped the plan in early 2007, and reintroduced plans with big buckets of minutes and higher fees for going over the allotted time.

At the end of the day, there’s nothing nefarious about what the companies are doing. Investing in vast data networks and offering all of the services they do is very expensive for cell-phone companies. And it’s no more possible to say what one call or text message really “costs” AT&T than it is to say what seat 12F “costs” Delta. You just try to make money off the network the best you’re able.

But it does mean you’ll probably pay less for your cell phone plan if you cut against the grain — risking the overages and taking the smaller basket of included minutes.


4 Total Comments
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  1. collapse expand

    I spent last May in a hospital bed in Houston, Texas after having foot surgery. Alone, recovering from surgery, and far from any loved ones, I ran up $400 in overages. Ouch. That sucked. But I’d never done it before and haven’t since.

    My husband and I almost never use all of our minutes, and yet, like you say, I am risk averse and don’t want to go over. Oh, foolish human that I am.

  2. collapse expand

    I used to get overage charges all the time then while I was trying to work out what plan would be better for me I discovered the prepaid options and decided to go with Straight Talk because they are on Verizon’s network nationwide and they also give the cheapest offers for those of us that like to talk and text all the time. I went for the unlimited talk, texts and data for $45 per month with is less than half the price I was paying before.

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    I'm a freelance writer and blogger based in Brooklyn, NY. My background is mostly in politics. I've worked on the editorial boards of the New York Sun and New York Post. In 2006, I wrote a book, "The Elephant in the Room: Evangelicals, Libertarians, and the Battle to Control the Republican Party" (Wiley). I've also done my share of freelancing, for places like the Atlantic Monthly, The New York Times, Reason, and RealClearPolitics.

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