Why Your Cellphone Bill is Decreasing

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.

Price Wars in the Detergent Aisle?

The Wall Street Journal reports that P&G is considering a less expensive version of its Tide laundry detergent again.  The company has witnessed "value" brands taking share from the premium branded products in the detergent aisle.  Several years ago, P&G tried to cope with that threat by offering Tide Basic, but it abandoned that effort as a result of consumer confusion and fears about cannibalization.  Here's an excerpt from the WSJ article: 

A decision to offer a lower-priced version of the premium brand carries the risk that buyers of regular Tide could trade down and stay there.  Indeed, three years ago P&G scrapped a lower-priced powdered detergent called Tide Basic, which was tested for about a year. P&G said consumers were having a hard time distinguishing between the bargain version and the regular priced variety. The company's concern was that regular Tide users would trade down to Tide Basic, for instance, but be unhappy that it didn't clean as well as regular Tide.

As clearly indicated from the excerpt above, P&G faces some significant risks with a decision to offer a lower-priced version of Tide.   The decision also brings other challenges though.  At the end of the article, we see a quote from a rival company's CEO.  Church & Dwight Chief Executive Jim Craigie states, "It'd be a terrible mistake, I think, if they pulled the price lever on some of their businesses.  Nobody wins a price war game."   This quote points out that P&G, as the category leader, has the ability to influence industry structure.   Launching a low-end version of Tide could trigger a price war, and thereby diminish the overall attractiveness/profitability of this category.  P&G may improve market share, but at the expense of profits for themselves and the industry as a whole.

The Church & Dwight CEO recognizes that you can influence the competition through signals and statements.  It appears that he's trying to signal to P&G that the introduction of a low-end Tide product would trigger an aggressive response by his firm.   In so doing, he may be trying to deter entry into the lower-priced segment which his firm has excelled in over the past few years.  One wonders if his firm (and others) are trying to send other signals to deter a Tide entry into the value segment.