Cell Phones…… Regulation?

In class we just got done talking about price floors and ceilings. As noted in class when these are applied to the economy they create inefficiencies and the market cannot run to its fullest capabilities. In this article it discusses the possibility of regulation with cell phones. Currently cell phone companies have high costs for customers that do not keep to their contract agreement. Many cell phone companies make their customers sign five to ten year contracts making it hard to switch to other competitors. By having these high switching costs it causes most customers to stay with the company even though they would rather go to another competing one. With government regulation they can create a price floor, and enforce how much the cell phone companies can charge. Also they can limit the amount of “sneakiness” or hidden costs.

In this article it found many advocates for the government to get involved. Christine Mailloux, a telecommunications attorney was noted by saying, “Consumers can't count on competition alone to get wireless companies to become more customer-friendly.” She instead believes this can be solved through stronger regulations. However, we as business students have been taught that regulation creates barriers for effective trading. So which side is right? Should the government intervene and regulate? Or do you think over time the competition will drive down the costs?


John said...

In order to answer the question of cell phone regulation, I think the reason behind the cancelation fees needs to be considered. I would wager that the acquisition cost of new customers is slightly higher than the cancelation fees. That way a company can save the cost of replacing a customer by threatening large fees for service cancelation. These savings could encourage competitors to stay in the industry knowing they have a possible solution to retaining customers.
If the government were to regulate those fees, decreasing these fees would take away some of the incentive for competitors to stay in the industry. Few players in an industry make price fixing easier. To me it seems like regulation in this area would end up hurting consumers more than helping. My vote is to let companies conduct business with as little regulation as possible so they can stay competitive.

Dr. Tufte said...

This justification for regulation sounds harebrained to me.

Cellphones are a product that customers pretty much beg to have. It's hard for me to see that their prices are anything other than extraordinarily cheap and fair.

The one area that I think might be a reasonable reason for regulation is in pricing to protect the cellphone companies. They are caught in a prisoners' dilemma with high fixed costs, and marginal costs so low that it is unlikely for them to make consistent profits. If anything, they need rate-or-return regulation.

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