Measure to protect cellphone users could backfire

MIT Sloan researcher finds plan to halt “bill shock” may be costly for those least able to afford it

CAMBRIDGE, Mass., December 1, 2011—A plan championed by consumer advocates and the Obama Administration to curb cellphone “bill shock” could actually harm those it is intended to help, according to MIT Sloan economist Michael D. Grubb.

The plan requires mobile phone companies to send text message warnings to users when they are about to exceed monthly calling, text, or data limits and incur higher charges. The Federal Communications Commission proposed the measure last year, and the major carriers last month agreed to implement it voluntarily.

Grubb, an assistant professor of applied economics, said his research into the behavior of both users and providers of cellphone service indicates that companies now will almost certainly restructure their calling plans to maintain profits.

“We don't expect firms to make less money. They are probably going to make about the same profits, and the way they are going to do that is by raising the fixed fee on some plans,” he said.

Under the agreement announced jointly by the FCC, CTIA-The Wireless Association, and Consumers Union, the companies will implement the free bill alert system over the next 12 months.

Grubb and a collaborator, Matthew Osborne, examined two years of detailed cellphone data from a large group of users at a major US university. By analyzing the behavior of consumers in the sample, the researchers were able to make predictions of how users would respond to possible changes to plans offered by a cellphone company.

The researchers also were able to forecast the responses of the cellphone companies to the expected shifts in consumer behavior, assuming that the companies will try to avoid any significant loss of profits.

According to the analysis by Grubb and Osborne, companies will not see any major change in profits from the bill shock notifications. Some consumers would pay more for service, and others would make fewer calls. Overall consumer welfare can be expected to fall, according to the researchers.

“When you add up the losses and profits of the companies and the benefits or harm to consumers, it could well be that this regulation overall is bad for society, and it could be bad for some consumers,” Grubb said.

Using a mathematical model and the data collected on cellphone usage, researchers Grubb and Osborne were able to determine that with the text message warnings, users with restrictive plans would indeed limit calls. But the companies’ expected response will be to raise monthly fees, the researchers found. “Consumers are going to end up paying a higher monthly fee,” Grubb said.

Grubb said he understands the motivation of the Obama Administration and Consumers Union for pushing for mandatory notifications to users.

“If you think that firms are going to keep their prices the same, bill shock regulation would definitely be good for consumers,” he said. “But firms are free to set prices and the market for mobile phone service hasn’t become any more competitive. Firms are not going to sit still and leave their prices the same.”

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