Cell-Phone Bills: Even Economists Can't Make Sense of Them

You're charged a lot if you use a cell phone a little. You're charged a little if you use your cell phone a lot.

A quote in a NY Times story nails the odd way most cell-phone bills work:

“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.”

This story is a must-read if you've ever stared in bafflement at your monthly bill or various service plan options. Here's one interesting tidbit:

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'd think that the high charges and fees are intended to make the service providers money—which they are, just not in straightforward fashion. They're meant to push people into opting for the next service plan price bracket, which would lessen the customer's chances of incurring such high charges, and also guarantee a certain steady amount of money heading the providers' way. Whether the customer actually spends less overall by opting for the higher-priced, flat service plan depends on how much he or she uses the phone from month to month.

These schemes tend to turn customers into heavy users—because if you're paying a flat bill no matter how much you use your phone, why not use it all the time, even when you don't really need to call someone, even when you're in a public place when people all around are staring at you with "shut up already!" eyes? The heavy cell-phone user, who seems to be the average cell-phone user in the U.S., tends to get more bang for their buck than someone who uses makes calls infrequently, and certainly more bang for their buck than someone whose usage is unpredictable, making lots of calls one month and none the next. From the Times:

Americans spend more money each month on their wireless bills than people in any other country. But the money we spend buys a whole lot more talk time and text messages than it does elsewhere. On average, we effectively spend about 5 cents per minute of talk time and about a penny a text message, lower than anywhere else in the developed world.

Again, this is all because Americans tend to use their cell phones a lot. Customers who use their cell phones less—similar to an average user in Finland, for example—pay as much as five times more than that customer in Finland. Basically, in the U.S. you're rewarded if yap and text all the time, and you're punished if you don't.

Per the Times, making sense of your cell-phone bill comes down to this:

Put simply, all a phone company wants is to get as much money as possible each month from its customers.

Read more:

The People Vs. Cell-Phone Tyranny: A Case for Lower Monthly Bills

Sans Cell Phone: Could It Actually Be Possible to Live Without One?

The Rise of the $30 Prepaid Monthly Cell Phone Bill