Today, Josh Levy waxed poetic about the tiered pricing announced by AT&T. As I mentioned in my previous entry, the danger in the low data limits is the future. Something Josh also pointed out.
But the point I hate is that AT&T is somehow evil because they aren't charging at the cost of providing the bandwidth. In other words, Josh believes that AT&T is in a perfectly competitive world where the price is equal to marginal cost (and equal to marginal revenue). Unfortunately, that's not the case. AT&T certainly faces a downward sloping demand curve and will price where marginal revenue is equal to marginal cost.
The second assumption (and wrong) in Josh's post is that users are 3G-dependent. The pricing structure is encouraging use over WIFI. And may actually induce competition to provide access to the web over WIFI. Sure, there are hot spots where it's free. But what about competition occurring between 3G and WIFI? A world where you could pay for access to WIFI that undercuts the perceived outrage over the tiered pricing of AT&T?
As Jeff Ely pointed out, most costumers are probably overestimating their usage and this outrage over killing innovation is probably misplaced. Rather, it just creates a constraint that people will innovate around.
Wednesday, June 9, 2010
Friday, June 4, 2010
AT&T pricing
Ah the internetz is buzzing with the rip off of AT&T yanking the unlimited data plan. My former graduate student instructor has a nice analysis up on this.
Basically, Jeff Ely notes that the new plan punishes people who are bad at forecasting their usage, especially those that underestimate. But the kicker is that most people are probably overestimating their usage and thus paying too much.
Jeff points out that the economics of an unlimited plan just don't make sense unless there is zero marginal cost of providing the bandwidth. And there clearly is not. But Jeff misses the social marginal cost. As any AT&T customer knows, the network can get clogged and some have trouble getting a connection, or a consistent connection. Many on the internetz have posited that AT&T network problems for the iPhone are due to too many people using up a limited resource.
What AT&T is trying to do is to get people to internalize that social marginal cost. The people who use gigs and gigs of data will actually have to pay for it or cut their usage (or even leave the network). Could this mean that the AT&T network will actually improve as customers will now use the data plans where their marginal benefit equals the social marginal cost?
On a side note, I wonder what the future holds as data usage for new devices like iPad may go well beyond the current tiered plans.
Basically, Jeff Ely notes that the new plan punishes people who are bad at forecasting their usage, especially those that underestimate. But the kicker is that most people are probably overestimating their usage and thus paying too much.
Jeff points out that the economics of an unlimited plan just don't make sense unless there is zero marginal cost of providing the bandwidth. And there clearly is not. But Jeff misses the social marginal cost. As any AT&T customer knows, the network can get clogged and some have trouble getting a connection, or a consistent connection. Many on the internetz have posited that AT&T network problems for the iPhone are due to too many people using up a limited resource.
What AT&T is trying to do is to get people to internalize that social marginal cost. The people who use gigs and gigs of data will actually have to pay for it or cut their usage (or even leave the network). Could this mean that the AT&T network will actually improve as customers will now use the data plans where their marginal benefit equals the social marginal cost?
On a side note, I wonder what the future holds as data usage for new devices like iPad may go well beyond the current tiered plans.
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