In an article by Ryan Knutson, the Wall Street Journal reports this morning that, "The cost of U.S. cellular service is rapidly plunging, reversing years of increases that have squeezed consumers’ budgets and generated huge profits for wireless companies." We are in the midst of a massive price war among the key players: AT&T, Verizon, Sprint, and T-Mobile. Knutson reports that prices have declined sharply in recent months: "The consumer-price index for wireless phone service, an indicator of current offers from cellphone service providers, dropped 12.5% in May from a year ago, according to the Labor Department. The index earlier fell 13% in April, the largest decline in the history of the category..."
Why is the price of cellphone service dropping sharply? Why are we experiencing a price war among the major players? First and foremost, we have an industry with incredibly high fixed costs and relatively low variable costs. The cost of the infrastructure and the technology is astronomical. The marginal cost for you to speak one additional minute or send one additional text is virtually zero. Thus, the service providers have an incentive to cut price in an effort to cover their high fixed costs. The same dynamic exists in the airline industry. The airlines have an incentive to cut price so as to fill every available seat, since the marginal costs of an additional passenger are very low. Moreover, the growth in the market has slowed. Since most Americans now have a cellphone, the service providers have very few new customers to grab. Instead, they find themselves fighting over each other's customers and trying to steal them from one another. These dynamics have sparked the price war. As customers, we benefit.