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What?! Economic theory doesn’t apply to consumer welfare?

I had one of those moments where I was reminded that heart disease runs in the family. Delana Derakhshani, policy counsel for Consumers Union offered testimony today before the Senate Sub-Committee on Communications, Technology, and the Internet where she asserted that when it comes to consumer welfare and wireless services, economic theory does not matter. Her statement was a rebuttal to an earlier statement by Mr. George Ford, chief economist for the Phoenix Center.

My first reaction to Ms. Derakhshani’s comment was to figuratively reach for my chest and take a couple deep breaths. I couldn’t believe my ears. It was one of the most asinine statements in a Congressional hearing that I’ve ever heard ( and we know that a Congressional hearing is ripe for those kind of statements).

Anyway, after seriously contemplating a four-hour drive back to Tallahassee to formally return by economics degree and seek a refund for four years of tuition, I decided to dig into the crates and pull out an old text book and look up the definition of consumer welfare.

According to Weimer and Vining’s Policy and Analysis: Concepts and Practice, consumers seek to increase the value they extract from the market place by finding a price for a good or service that is lower than they maximum they are prepared to pay. The wider the gap between the price offered in the market and the price the consumer is willing to pay, the greater the consumers welfare.

In the competitive market that Ms. Derakhshani and other consumer advocates claim to want, the consumer is willing to pay the maximum amount, the value of the service or good, that his budget or other consumption constraints allow. In other words, it’s not up to a wireless carrier to worry about a potential wireless subscriber’s budget constraints. If the subscriber can’t afford the carrier’s text message services or data plans, the subscriber is free to do without the service or seek out another carrier who is willing to adjust their rates downward or offer some deal sweetener in order to garner the subscriber.

Just as importantly, it is not up to government to help find that balance between happy smartphone purchaser and happy wireless carrier. That’s not the role of government in a market economy.

On bill shock, FCC is shockingly unfocused

Posted February 9th, 2011 in bill shock, FCC, Government Regulation and tagged , , by Alton Drew

The comment period on the FCC’s bill shock proceeding ended yesterday. I thought it would be a good time to revisit the item especially since its been awhile since I first posted on it. Time and distance may make a heart fonder, but not for bill shock.

There is a blatant, inconvenient truth overlooked by the FCC: consumers should hold themselves accountable for not understanding their calling plans. The nature of the competitive landscape in wireless services is such that wireless companies already disclose information on price and data usage.

In addition, wireless companies already offer a diverse array of ways to monitor cell phone and data uses for free. Given its consumer protection responsibilities I can understand the FCC’s concern about consumers being wrongfully charged for services they did not subscribe to.

I can see why the FCC would be concerned about a telecommunications company assessing a fee that was not disclosed to the consumer in advance. Consumers need this type of information when negotiating for services. To steal President Obama’s phrase of the week, “I get it.“

What I don’t get is some of the other rationale for its notice of proposed ruling in this space. For example, why is the FCC concerned with disparities between how wireless service providers alert subscribers about their usage? Why is the FCC concerned with methods that competitive providers use to retain subscribers?

The types of alerts that providers make available are a result of the costs of the alert and the supposed benefit a provider may receive from keeping the subscriber happy. It’s called customer service and these operational decisions should be left up to the business judgment of the provider, not to a slightly tainted vision of a regulator.

Government requirements specifying how and when consumers must be provided with information about their usage, such as voice and text alerts are too intrusive. Furthermore, such requirements delve into the complexities of wireless network operations, and in the end could ultimately pass a higher cost burden onto the customer

One of the more extreme ideas tossed around by the FCC and various “public interest” groups would have a customers’ cell phone cut off when the plan is tapped out, referred to as the “circuit breaker” provision.

For the FCC to even think of a “circuit breaker“ provision is just another example of what type of regard the agency holds consumers. To promote consumer choice on the one hand and then recommend a policy that amounts to coddling grown adults on the other makes no sense. A circuit breaker policy devalues the value of the network by reducing usage to a suboptimal point.

In addition, there is the expense of deactivating and reactivating phones on an increased basis. Such a provision would result in higher costs being passed through to customers via higher activation charges and/or monthly charges.

Our public interest should be in maintaining our telecommunications networks at optimal usage, not introducing service hiccups.

Bill shock: What ever happened to reading the bill each month?

My mother, a 67-year old grandmother who lives alone, called me about her cell phone bill. She was “shocked” at the 30% increase in the bill amount. A couple days later my sister, eight-year old son, and I stopped over to my mom’s place and the subject of the bill came up. My son, who is shock averse, quickly dispatched himself to the back room to watch Sponge Bob Square Pants. After an hour or so we came up with a strategy for working around any future “bill shock” problems.

My mother, who only has a high school diploma from night school, determined that given her calling behavior and the number of local, long distance, and international calls she makes, plus her mobility, that an alternative combination of existing telecommunications services could best be employed to avoid any future “bill shock.” Applying the alternative services, she is now able to make more calls anytime she likes at a lower price.

My mother is the example of a proactive consumer. This is a far cry from the “Ooops, I messed up so let me blame someone else” consumer that Federal Communications Commission chairman Julius Genachowski appears prepared to defend. Consumers like an executive Mr. Genachowski referred to in a speech on bill shock three months ago. It seems that this executive was shocked that his cell phone bill would run a couple thousand dollars after transferring data overseas.

I repeat. Overseas. You would think that an educated international jet setting executive would have the presence of mind to expect that in a foreign jurisdiction there would be different rules regarding telephone rates just like there are different prices for eating overseas.

Yet, Mr. Genachowski would like the mobile telephone industry to find more ways to use technology to alert consumers when they may be going over their minutes based on his executive‘s dilemma and other outlier consumers. And lets not forget driving up our cell phone bills in the process.

Heck. I was under the impression that we were running out of spectrum. I may have been wrong.

Look. I have no problem with cell phone companies disclosing their rates, terms, and conditions each month in cell phone bills. It is a bit much, however, to require them to reconfigure their billing systems to send me an alert about possibly going over my minutes of use limit when all I have to do is look at the clock on my phone, determine how long I talked, and subtract the talk time from my monthly minutes.

We already have the technology for knowing when we are running out of minutes. It’s called our brains and eyes. I don’t want another line item that says “bill shock avoidance fee” on my bill either. Besides, doesn’t everyone have a sexy female voice on their phones telling them how many minutes they have left anyway?

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