Matthew Osborne, assistant professor of marketing in the department of management at the University of Toronto Mississauga, explains how cell phone bill shock occurs and what to do about it.
Matthew Osborne is an Assistant Professor of Marketing in the Department of Management at the University of Toronto Mississauga, with a cross-appointment to the Marketing Area at Rotman. His research interests include the development of modelling techniques to help understand consumer choices and firm behaviour. His research has focused on areas such as consumer choice of wireless carriers, consumer learning about new products, and how firms price in markets where transport costs are important. His research papers have been published in journals such as The American Economic Review, Economics Letters, Quantitative Marketing and Economics, and the RAND Journal of Economics.
Cell Phone Bill Shock
Almost everyone is familiar with the idea of cellphone bill shock: when at the end of the month you get an unexpectedly high bill because you talked or texted too much. Part of the reason that we face this problem is due to the structure of cellular phone plans: our contracts usually give us a certain number of monthly free minutes, but then we get charged a very high overage rate when use more. In a detailed study of cell phone usage by university students, we identify two reasons for bill shock.
First, it is difficult for people to track their usage over the course of a billing cycle. Second, people don’t do a very good job of forecasting how much they will use. (Because of this, people choose cellphone plans with too few free minutes, and use more minutes than they expect.) In lots of countries, including the US, government agencies have proposed regulations to help combat bill shock which would require cell phone companies to send text messages or alerts to their customers when they use up their free minutes. As a result of this, we can show using a model estimated on our data that consumers would spend a lot less on extra charges.
However, we identify a potential flaw in this regulation: cellphone companies make significant revenues from overages, and using our model we predict that cellphone companies would raise monthly fees in order to recoup lost profits. Once we factor price changes into account, some consumers are in fact harmed by the regulation. We believe that providing better information to consumers and stronger competition policy can be better avenues to help consumers avoid bill shock.