Michael Grubb on FCC "bill shock" plan: It could deliver a new jolt to consumers

MIT Sloan Asst. Prof. Michael Grubb

The major cell phone companies recently bowed to pressure from consumer activists and the Obama Administration and agreed to warn users via text message when they are about to exceed the limits of their calling plans. FCC Chairman Julius Genachowski and President Obama himself hailed the agreement. Consumers Union Counsel Parul P. Desai said, “Ultimately, this is about helping people protect their pocketbooks, so we applaud the FCC and the industry for this effort to do right by consumers.”

But would this move to prevent “bill shock”—those big, unexpected charges on monthly bills— really make consumers better off?

If one assumes the cellular phone companies will keep prices the same, then the answer is clearly yes. But is this assumption realistic? Bill shock alerts help consumers avoid overage charges but aren’t likely to make them more cost conscious when they choose a cell phone company. As a result, bill shock alerts aren’t likely to intensify competition between companies. The most likely scenario then is that companies will restructure their pricing plans to recover profits lost in the bill shock agreement.

In my research, my co-author and I model the behavior of cell phone users and cell phone companies. We do this by analyzing data from actual users to see how they choose calling plans and make phone calls in response to prices. We then try to determine how firms will respond to shifts in consumer behavior by assuming that the companies will attempt to maximize profits.

When bill shock warnings are incorporated into the models, we find  that the companies can be expected to increase both included minutes and monthly fees on calling plans. Bill-shock alerts help consumers avoid overage charges by cutting back their calling but companies make the same profits by charging higher monthly fees. On average, consumers are left paying the same bills they have paid in the past, but making fewer phone calls.

The cell phone warnings may, indeed, curb the unpleasant phenomenon of bill shock, but some consumers may find the solution to be quite painful as well.

Michael Grubb is Assistant Professor of Applied Economics

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