Skip to main content

Taking a look at different mobile phone providers and the choices they offer for prepaid calling and texting plans, I discovered an interesting similarity among many of them. The three large companies I looked into, AT&T, Verizon and T-mobile, all offered an unlimited calling and texting plan for a certain price, and a calling and texting plan with limited amount of talking minutes and texts for cheaper. This, of course, is not surprising; what caught my attention was the fact that even the second, limited option, includes unlimited calls and texts to cell phones of the same provider.

Knowing that there is no associated cost for the phone companies for facilitating calls to different providers, the most rational explanation for the companies’ choice to offer unlimited services within the users of the company has to do with marketing techniques; sure enough, an offer like that could make people choose the company their friends use, so that they could get unlimited services for a lower price.

The pattern of choosing something that other people are using due to the direct benefit it offers immediately brings in mind the concept of network effect, and could make us predict the formation of a cascade. If more and more people chose to switch from their phone company to the one the people close to them are using, and buy a cheaper plan with limited services to other providers, but unlimited service to users of the same company, we would soon have a phone provider market very close to a monopoly (like those of Facebook and Google). However, this is not the case in this market, as users are divided pretty equally among some large companies.

We can now explore how this balance is maintained. First, research () shows that most cell phone users with prepaid plans choose the unlimited plan instead of the cheaper, limited one. This shows that they value the extra service that it provides, i.e. the unlimited calls and text to users of different companies. This fact, now, can bring us back to the fact we started with, that indeed there is no company with a large enough number of users that its users would need to communicate with each other much more than with users of other companies—in other words, there is a balance in the market.

This balance can only be interrupted if one of the companies managed to start a cascade by gathering a significantly large number of customers. In such a situation, everyone would be directly benefitted by choosing that company, and it would gain a huge amount of power. The companies’ goal is, now, to find a way to attract such a large number of customers from the other companies, in order to get the cascade to start…



Leave a Reply

Blogging Calendar

November 2012