The Weird Economics of Cellular Calling Plans

Yesterday’s New York Times has an amusing article about the complexities of cell phone pricing (ht: Carolyn):

HERE’S a consolation prize to the millions who recoil in bafflement from cellphone companies’ labyrinthine price plans, with their ever more intricate arrays of minutes, messages and megabytes: Economists don’t understand them, either.

“The whole pricing thing is weird,” said Barry Nalebuff, an economics professor at the Yale School of Management. “You pay $60 to make your first phone call. Your next 1,000 minutes are free. Then the minute after that costs 35 cents.”

I frequently use cell phone pricing to illustrate key ideas in my microeconomics class. For example, why is it often impossible to get a signal for my beloved iPhone? Because the marginal cost of downloading data is zero, and AT&T’s bandwidth is often overwhelmed. And why do cell phones usually charge a monthly fee rather than just a per-call or per-minute fee? Because they can get more revenue by offering a low (or zero) per-minute price coupled to a high monthly fee.

Still, as the article suggests, the complexity of cell phone pricing can sometimes seems inexplicable. Which reminds me of one of my favorite TV ads, starring Catherine Zeta Jones and a group of economists who are determined to explain cell phone pricing to consumers:

For my interpretation of the ad, see this post.

2 thoughts on “The Weird Economics of Cellular Calling Plans”

  1. It is even worse in the corporate environment (a personal area of expertise) where some contracts allow companies to bundle minutes for all users. This has sometimes resulted in the optimal strategy being to leave unused phones in service after an employee is terminated. It is cheaper to pay the monthly fee on the unused phone and continue to aggregate the minutes than pay overage charges.

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