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July 19, 2007

Our Uncompetitive Cell Phone Market

Tom lee explains it all:

Nearly all phones are locked, minimizing their resale value. Transferring your contact information between low-to-midrange phones is difficult or impossible. Until recently, you couldn't take your phone number with you (number portability is a much-loved big-government mandate that the carriers fought tooth & nail). Although some carriers let you transfer your contract to someone else without paying an ETF, doing so while retaining your number is more than a little tricky, if not downright impossible. And of course, contract lengths are typically longer than a mobile phone's technological relevance, ensuring that these barriers will be in place until the phone is worth only a fraction of its initial value, needs a new lithium battery, and is generally headed for the donation bin.

The leading cellular companies have fought hard to maximize their profits at the expense of competition that would benefit the consumer. An excellent example of that was, as Tom points out, the many years when your phone number was controlled by your cellular service carrier, and you couldn't change companies without losing your number. A libertarian, of course, would say that you could still change carriers and just give people the new number -- but no one is accusing the Cingular of entirely destroying competition, just muting its beneficial effects in order to jack up their profits.

Competition, of the right sort, is good! But sometimes you need regulatory action to enable it. So if you're not a libertarian and are thus uninterested in rationalizing why companies should be able to do just about anything that increases their profits, you might be interested in this article (via) on how the French government stepped in to create a competitive market in broadband. "In 2001, France had one of the weakest markets for broadband Internet access in the developed world, with less than a quarter of the penetration of the U.S. Today, it has sailed past the U.S. to become one of the world's most wired nations..." The article goes on to explain the regulatory decisions the French government made that fostered this improvement, and contrasts that with the regulatory decisions that American companies have blocked, leaving us with a stagnant, substandard, and astonishingly expensive broadband market. It's notable here that the Wall Street Journal accused Clinton's FCC commissioner of being a "French Bureaucrat." Oh, if only...

July 19, 2007 | Permalink


You're citing the French for an industrial regulation model? Are you just trying to see how many trolls you can get in one place at one time?

Posted by: Meh | Jul 19, 2007 3:44:36 PM

I think there are points in time when the gov't does need to get involved in order to help create better markets. As a libertarian type (not sure I've gone full Arnold Kling yet), I'm not so opposed to this in certain situations. While there's a lot of bad gov't regulations, not all are bad. I would think those that go towards the creation of better markets are supportable by most libertarians.

I don't know enough about the telco business to comment directly on this. Telco used to be one of those natural monopolies that all agreed the gov't should regulate.

As far as the French go: a broken clock still gets the time right twice a day. :)

Posted by: DM | Jul 19, 2007 5:03:22 PM

I think the Libertarian would argue that "phone number portability" is a good which either does or does not come with a new phone contract. A rational consumer (in the economist sense of "rational") would take into account how much he values portability when deciding which company to purchase phone service from. Then, if some companies offered portability and some did not, he could chooose between them. Since most people value portability greatly when it come time to switch services (how much would you pay?) and the procedural cost to a company is small, most companies should theoretically offer it.

So why don't they? A market failure. Like most bundled goods, cell phone plans are difficult for a consumer to evaluate. The specific problem here is that most consumers simply don't think to ask about portability when they buy the cell service. They are merely human.

This "big-government" mandate" is so popular because it is easy to identify and easy to fix. (Easy to identify because the value to the consumer is clearly high, and to cost to the companies is clearly small, yet it is absent from most contracts. Easy to fix with concise government regulation.) However, many market failures are not so easy.

Posted by: NJerseyGuy | Jul 19, 2007 8:18:06 PM

There's probably some sort of infrastructure related problem--and not entirely related to costs--that will answer my question, but in there isn't, I'm wondering why one of the really small companies, or even one of the smaller big four, like Sprint or T-Mobile out of those two and Verizon and AT&T, doesn't start a cell phone company that breaks all of these rules. It could offer more flexible contracts and change the things people hate most. It'd be very tough to get people to break their contracts, but every month, someone's contract expires, and over time, with enough people signing up as their contracts expire, the other companies would follow suit.

Posted by: Brian | Jul 19, 2007 8:55:58 PM

I think that one of the things that "market fundamentalists" tend to overlook is that as bad as government regulation of a market can be, big companies don't like free markets either. They like monopolies or cartels, which tend to be very profitable for them, but terrible for consumers. A little market friendly regulation in the telecom industry definitely wouldn't go amiss.

Posted by: TW Andrews | Jul 20, 2007 10:03:39 AM


The nature of an oligopoly (several very powerful actors) is that there are few enough sellers that even without collective coordination, everyone knows that they will benefit by not breaking off and becoming a cutthroat competitor, because they know that the others aren't likely to do it either. When you have many sellers, there is a far greater danger that someone else is going to go ahead and do it, so there's a great incentive to do it first.

So if the XYZ cellphone company, one of the four major players, decided to break off and do it, they would know that the others would all immediately match them. And then, they would simply make less money than they would under the current environment.

Posted by: Dilan Esper | Jul 20, 2007 4:42:03 PM

I should also take note of the fact that article states that the French allowed foreign companies to compete in the broadband market. This is very interesting and gets to something that is underreported-- despite our trumpeting of free trade, we are remarkably unwilling to allow foreign competition in major industries. For example, it is VERY difficult for a foreign airline to do business in the United States (they basically have to create an affiliate with American ownership). This, of course, means more oligopolies and monopolies and higher prices.

Posted by: Dilan Esper | Jul 20, 2007 4:45:25 PM

I'll buy a cell phone when I can use Skype on it.

Posted by: Susan | Jul 21, 2007 2:52:00 AM

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