Market Pricing and Cellphones

A friend of mine has traveled to South Africa from here in the US. She now has a cellphone and was pleased to report that incomming calls are free!

Here’s a little insta-theory I’ve constructed about that.

If you own a market place you charge the buyers and sellers who come into your market fees for the services provided by your market making activities. There are lots of different kinds of markets. For example eBay where they charge the sellers. Singles bars (aka meat markets) where they tend to forgo charging women the cover charge.

Phone companies provide markets where calls are transacted. Instead of buyers and sellers they have callers and call recipients.

It’s very rare for a market maker to charge both sides of the transaction exactly the same amount to come to the fair. The sellers at the boat show pay a lot more for access. But if it’s a enough good fair the owner can charge the crowd to get into the tent. As long as the market owner can distinquish the buyers from the sellers then he can use that information to price discrimate. Or to put it in more general terms he can charge more to the ones who are most willing to pay.

Lots of things drive willingness to pay, but generally the wealth are more willing to pay than the poor and that’s my theory.

In the US cell phones emerged as a toy for the rich. So when the cell phone first emerged the phone owners, on average, were more willing and able to pay for the calls than the average line line owner. When cell phones showed up most everybody here had a land line. The market owners, i.e. phone companies, naturally setup the pricing to charge the call phone side of the market.

The situation was totally reversed in many other regions. Land lines weren’t common. In fact having a land line was a signal to the market owner that you were better off than the average citizen. Owning a land line was a signal of higher willingness to pay, compared to the average citizen. The cell phone companies sold their product to the unserved market, i.e. a market on average less well off and hence with lower willingness/ablity to pay. So it was natural for them to charge the land line side more than the cell side.

Charging the call initator for the call is a proxy for what they really want to do, which is to charge the well off land line callers more to call over into less well of population of cell phone owners.

It’s an insta-theory. It would be real work, which I’m to lazy todo, to flesh it out completely. For example there is an entire subplot about cross border call termination that should have similar themes.

I find it facinating how a pricing model that emerges early in a market’s life can persist, making it extremely difficult for the market to transition into new forms.

2 thoughts on “Market Pricing and Cellphones

  1. Avik

    Interesting theory, quite plausible, except for the last bit… persitence and transtions.

    When cell phones came into India 10-12 years ago, local call rates for mobiles were over 50 cents a minute, paid by the cell phone users, both for recieving and calling. The land line user paid the same (lowish) amount, irrespective of whether he called mobiles or land lines.

    Today, land line users pay around 2 cents a minute to call mobiles, mobile users pay around 4 cents a minute to call anyone, and recieving calls on mobiles are free.

    Mobile users are poised to overtake landline numbers very soon (probably already has, not sure, but its close)

    Actually, writing this caused me increased realisation of how much things have changed!

  2. Ian Holsman

    I had a different take to this.
    when I first came to the US 6-7 years ago, cell phones were rare and not around, most people used pagers.
    now.. the way the world charged for cell phones were that the person making the call paid for the call.
    now in the US, where people aren’t used to paying for timed calls the market folk that no one would pay
    to call someone with a cell phone… so they charged the cell phone owner (and encouraged people to cal them
    on it).

    I kind of like the idea.. much more interesting way of doing it… why should I pay the price of contacting you just because you are
    moving around everywhere ..

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