Why don’t cell phone companies price per minute?

David Pogue (via Kottke) asks:

Why doesn’t someone start a cellphone company that bills you only for
what you use? That model works O.K. for the electricity, gas and water
companies — and people would beat a path to its door.

Of course many companies will charge you by the minute.  Overseas, per minute plans are more common yet.  The puzzle I think is why the standard American plan is per month, with perhaps a non-convex minutes cap, rather than per minute.

The most likely answer combines price discrimination with consumer misjudgment.  If the company puts a very high marginal per minute price right at the cap, some consumers will, in self-deceiving fashion, think they are getting a good deal but then chat themselves into near-bankruptcy.  For the other consumers, you are forcing them to buy minutes as part of a bundle.  It is well know this can be an efficient means of price discrimination across high-value and low-value demanders; see my earlier post on cable bundling for a full explanation of the economics.

Why doesn’t competition break down such schemes?  First, cell phone competition has become more intense only with number portability in the last few years; we can expect pricing schemes to continue to evolve.  Second, the cost structure of the company may have more to do with marketing than with the cost of supplying extra miniutes.  So "marginal cost pricing," or the nearest approximation thereof, may involve "per customer" charges (a fixed monthly fee) rather than "per minute" charges. 

Of course they’ll let you opt out of all of this if you pay a high enough per minute charge, thereby reimbursing them for the fixed cost they paid upfront to recruit you.  That all said, if you go to Western Union and buy one of those cards with minutes to Sierra Leone, it seems that true marginal cost pricing reigns, subject of course to some probability of a fraudulent or difficult-to-use card.


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