The High Cost of Loving Your Phone

In a classic bit of economic sleuthing, Minjung Park, an assistant professor of economics at the University of Minnesota, looked at the impact of the Federal Communications Commission's mandate that customers could keep their phone numbers when they switched carriers, starting in late 2003 in large markets and mid-2004 in smaller ones.

She examined more than 100,000 calling plans and found that the prices of wireless plans dropped by as much as 6.8 percent in the seven months after the rule change. After adjusting for the overall trend in wireless prices, she calculated that the savings totaled $845 million during that period. That evidence fits the prevailing thinking about switching costs and market competition: reduce the switching costs and companies will cut prices to acquire new customers. The other half of the economic theory, and the reason that economists are still debating the impact of switching costs, is that companies have every incentive to raise prices on the customers they have already captured. That looks like what AT&T is doing to some of its customers. The perverse lesson from all of this for the consumer? Infidelity often pays off better than blind loyalty.