HERES a consolation prize to the millions who recoil in bafflement from cellphone companies labyrinthine price plans, with their ever more intricate arrays of minutes, messages and megabytes: Economists dont understand them, either.
The whole pricing thing is weird, said Barry Nalebuff, an economics professor at the Yale School of Management. You pay $60 to make your first phone call. Your next 1,000 minutes are free. Then the minute after that costs 35 cents.
To economists, it simply doesnt make sense to make chatterboxes pay that penalty. After all, most businesses tend to give discounts to customers who buy more.
It would be easy to see the cellphone companies simply as avaricious oligopolists trying to gouge consumers for every penny they can. And in some senses they are aiming to maximize revenue, at least as much as the market will let them.
But understanding the psychological nuances of how a price plan affects customers behavior is at least as important to running a cellphone company today as knowing how radio waves spread over a city. Those high charges for going over your allotted minutes, for example, are designed to cause you enough pain that you will switch to a plan with a higher regular fee.
You give people a really good bargain on this bucket of minutes, explained Roger Entner, a senior vice president for telecommunications research at Nielsen. People are risk averse, so you have a relatively high overage charge, which gets people to overbuy. You also get really predictable revenue out of it, which Wall Street loves.
Neither the cellphone companies nor their customers, as it turns out, always act in the rational way that economists might predict. Consumers often put immediate gratification and the avoidance of unpleasant surprises above their long-term interests. The companies, meanwhile, are trying to meet the sometimes irrational expectations of investors, who want growth without too much nasty volatility, even if their profits suffer.
