Monday, April 25, 2011

Cellphone Economics: Free Markets Spread Wealth

New York Times — "It’s not quite the stuff of bragging rights, but Arkansas and Mississippi find themselves at the top of a new state ranking: They have the highest concentrations of people in the nation who have abandoned landlines in favor of cellular phones. At the other extreme? People in Rhode Island, Connecticut and New Jersey are still holding on to their landlines, and they have the lowest concentrations of people whose homes use only cellphones. 

According to Stephen Blumberg, the researcher who conducted the study, nearly 40 percent of all adults living in poverty use only cellphones, compared with about 21 percent of adults with higher incomes. There appear to be many reasons for this. Cellular phones have become more affordable. The barrier to owning one is lower with pay-as-you-go plans. Some states allow subsidies for low-income residents to be applied to wireless bills. And increasingly, those who cannot afford both types of phones choose their cellular phone."

James Taranto comments in the WSJ:

"Once again, a landline telephone--or, as it used to be called, "a telephone"--is a symbol of wealth. Between the olden days of 1990 and today, we've heard endless complaints, including in the Times, about rising "income inequality." In a strange twist, we've even ended up with a president who has said he would like to "spread the wealth around" by heavily taxing the "rich" and increasing handouts to the "poor." The story of the cellphone shows how a free economy spreads wealth. In actual material terms, the "poor" get richer as the rich also get richer."

MP: The chart above shows the dramatic 40% decline in the CPI for cell phone services that is the driving force in the significant increase in cell phone affordability, which was led to the widespread adoption of this new technology by America's poor.  Thanks to James Taranto for pointing to a great example of how competitive free markets help "spread the wealth."


At 4/25/2011 8:53 AM, Blogger Steve said...

Isn't that a 40% drop? 100 -> 60 ?

Just making sure I'm not interpreting CPI graphs incorrectly...

At 4/25/2011 8:58 AM, Blogger Mark J. Perry said...

Steve: Yes, thanks. It's fixed now.

At 4/25/2011 9:15 AM, Blogger Dr. Goose said...

I may be missing something, but how does abandoning one's landline constitute "actual material wealth?"

At 4/25/2011 9:24 AM, Blogger Seth said...

This reminds me of a post I made last year: "We Can Now Afford Gardens".

At 4/25/2011 9:54 AM, Blogger bob wright said...

CNBC ran this story with a graph of CPI:Services going back to 1957.

No inflation in the service sector.

At 4/25/2011 10:09 AM, Blogger rvturnage said...

Isn't it nice that the FCC has decided to get on board and protect us from those falling prices by price controlling roaming rates? Obviously, the market wasn't working right, since prices have only dropped 40%.

At 4/25/2011 11:01 AM, Blogger morganovich said...


that chart is not a valid comparison. the CPI calculation was dramatically altered once in the 80's and once in 1992. (in both cases lessening reported CPI)

the previous data was never normalized to this.

thus, you cannot compare CPI now to CPI in the prior period and draw meaningful comparisons.

it's like switching your speedometer from KMPH to MPH and claiming you slowed down.

At 4/25/2011 11:07 AM, Blogger Don said...

This is perhaps one of the most important lessons about the free market, but one which is lost on so many (educated) people. In my own field, education, it is incredibly hard to put this point across. If I were to say "Free markets spread wealth" along with numerous examples, I'd receive gaping stares, as if I'd said something like "You can boil old tires for soup." For most people, only government can spread wealth.

At 4/25/2011 11:43 AM, Blogger Jim said...

Homeless people have cell phones! Nuff said!!

At 4/25/2011 12:04 PM, Blogger Benjamin said...

I dropped four land lines (and did give up a fax) that were running $200 a month, for one cell phone, at $50 a month.

I have unlimited national calling, Through a calling card I call Thailand for 1.2 cents per minute.

In the private sector, hardware just gets better, cheaper, easier-to-use, and more resilient.

Would that we could say the same for military hardware, which only becomes more expensive all the time, and evidently less reliable.

You can't let the federal government have too much money.

At 4/25/2011 5:43 PM, Anonymous Anonymous said...

I went cellphone-only right around where that big price drop ended, 2000-2001. I then went voice-over-IP only for a handful of years recently, which was even cheaper. Which brings up what I think might be the most interesting aspect of that graph, the fact that CPI flattened out during the last decade, meaning it actually went up a little after factoring in inflation. This happened despite mobile bandwidth increasing a lot, with the introduction of 3G and now 4G during that span. There are only two reasons this could be: consumers are used to paying $50/month for landline phone service so that set a price floor in expectations and the more important reason, there are only 2-3 viable choices in most markets, ie an oligopoly.

At 4/25/2011 6:29 PM, Anonymous Anonymous said...

In terms of actual cost, there's no reason for voice minutes to have held up like that. For example, AT&T now offers 900 rollover minutes for $60/month. Assuming 8 KB/s data rate set aside for voice, probably generous as it's most likely 5-6 KB/s, that comes out to around $150 per Gigabyte of low-latency voice data. By comparison, they have a 4 GB data plan on their HSPA+ "4G" network for $45, which works out to $11.25/GB. Now, the voice data is probably lower latency, meaning it's on a special faster lane to make sure it gets there quicker, as you'll notice a slowdown in the middle of your live phone conversation but probably won't care if the photo you're downloading slows down a little in the middle, since you only care about it when it's done.

At 4/25/2011 6:31 PM, Anonymous Anonymous said...

And since I'm not one these "network neutrality" blithering idiots who think there shouldn't be any fast lanes no matter what, I'm fine with the principle of AT&T charging more, but there's no reason it should cost 14 times as much. I'm not even going to bother doing the math on text messaging, as that probably works out to more than a thousand dollars per GB, proving yet again that only morons text. ;) The point is, the only reason those price drops didn't continue is the stupid ways that the FCC has regulated cellular service in the last decade and the way certain companies have taken advantage of that.

At 4/25/2011 6:34 PM, Blogger Audacity17 said...

I live in Arkansas and can attest that part of the reason so many people have gone cellphone only is due to the horrible landline infrastructure. One AT&T tech told me the area I live in is the worst in the country. So this is an example of better tech driving out inferior. Unfortunately we still have awful internet value, looking forward to a big cellular network to fix that next.

At 4/26/2011 6:19 PM, Blogger VangelV said...

Homeless people have cell phones! Nuff said!!

Peasants in China have cell phones so there should be no surprise that more people in the US are getting them. And in Hong Kong, Italy, Germany, Singapore, Bulgaria, Brazil, and a number of other countries there are more cell phones than people.

The fact that prices have fallen is not a surprise because this is what always happens when a high tech product is first introduced. And when you look at the big picture you see that phone services have not fallen nearly as rapidly as handset prices.

At 4/26/2011 6:20 PM, Blogger VangelV said...

I live in Arkansas and can attest that part of the reason so many people have gone cellphone only is due to the horrible landline infrastructure.

Most developing world consumers have gone directly to cell phones for the same reason.


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