Monday, December 08, 2008

Has Consumer Reports discovered a case of price gouging? A quiz

(Warning: non-sports post)


In the latest issue of Consumer Reports, CR makes accusations of price gouging against a particular industry.


Here's a quiz. One of the excerpts below is the real CR article. The other I just made up. Can you tell which is which?

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1. Why texting is too $$$

Jerry Sobieski's teenagers are forever sending text messages to friends on their cell phones instead of calling them. What baffles and infuriates Sobieski, a computer network engineer from Woodbine, Md., are the rates wireless carriers charge their customers to send and receive text messages.

"Text messages take up almost nothing on their networks, but the carriers are charging much more for them than they do for phone calls, which use up a heck of a lot more space," he says. "The rates for texting are completely outrageous."

Three years ago, those rates were 10 cents per text at the nation's four big wireless carriers: AT&T, Sprint, T-Mobile, and Verizon Wireless. Each company raised rates to 15 cents, then to 20 cents.

Text files are small and cost carriers very little to transmit, so texting is exponentially more expensive to consumers in terms of network space than other cell services. Five hundred text messages contain less data than a 1-minute voice transmission.

Sen. Herb Kohl, D-Wis., also questions text-messaging rates. In letters to the above companies, Kohl, chairman of the Senate's antitrust subcommittee, demanded that wireless carriers explain why they've doubled the cost to customers in near lockstep. Kohl says he's particularly concerned that the rate jump appears not to be based on a rise in the cost of transmitting text messages.

Some carriers say that texting rates are actually lower now because most customers buy monthly buckets of messages. Consumers Union isn't swayed. Not all customers send or receive enough texts in a month to warrant a plan. Those who don't must shell out for messages they won't use or must pay the higher per-text rate.

In recent years, industry consolidation has greatly reduced the number of wireless carriers. That's troubling, particularly when carriers engage in anti-consumer behavior. CU has asked federal officials to investigate text-messaging rates in this supposedly competitive industry. They should ask tough questions about the actual costs to carriers, so that consumers aren't saddled with an unwarranted expense.

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2. Why the Consumer Reports Website is too $$$

Jerry Sobieski's family is forever going to the Consumer Reports website to look up which products are best. What baffles and infuriates Sobieski, a computer network engineer from Woodbine, Md., is the rate CR charges its customers to research products on its site.

"CR web traffic takes up almost nothing on the internet, but CR is charging much more for the website than they do the magazine, even though the magazine uses up a heck of a lot more physical resources," he says. "The rates for the CR website are completely outrageous."

It costs $5.95 to access the CR website for one month.

Internet data costs CR almost nothing to transmit, so the website is exponentially more expensive to consumers in terms of actual resources used. The bandwidth for five hundred website hits costs CR less to provide than a single print issue of CR.

Sen. Herb Kohl, D-Wis., also questions CR's pricing policy. In letters to Consumers' Union, Kohl, chairman of the Senate's antitrust subcommittee, demanded that CR explain its cost to consumers. Kohl says he's particularly concerned that the price appears not to be based on the cost of maintaining CR's internet connection.

CR says website rates are actually lower now because most customers buy an annual subscription to the website, which costs $26. Consumers Union isn't swayed. Not all customers research enough products in a year to warrant a subscription. Those who don't must shell out for access they won't use or must pay the higher per-month rate.

In recent decades, industry changes have greatly reduced the number of not-for-profit consumer magazines with websites. That's troubling, particularly when the only such US organization engages in anti-consumer behavior. CU has asked federal officials to investigate web subscription rates in this supposedly competitive industry. They should ask tough questions about the actual costs to CR, so that subscribers aren't saddled with an unwarranted expense.

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So did you guess which is Consumer Reports' real complaint? For the record, the answer is here.


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5 Comments:

At Monday, December 08, 2008 10:04:00 AM, Blogger maplestar said...

Give me a break! When you are paying for SMS you're paying for your message to be transmitted to another person; when you're paying for CR's website, you're paying for their content to be transmitted to you AND you're paying for them to create that content.

I hate "analogies" that are not analogous.

 
At Monday, December 08, 2008 11:34:00 AM, Blogger Tangotiger said...

The analogy, I believe, is text to voice comparison, against web content to print content comparison. It is NOT a comparison of text to web content.

The pricing of CR seems to be consistent with WSJ:
https://order.wsj.com/sub/f2

Most other sites offer a far better price differential (often free).

So, CR and WSJ have a core audience that will simply follow them wherever they go at whatever the price, and so, even though they have better margins online, they will not pass those savings along.

Seeing the high churn rate of cell phone providers, they don't have that same benefit. However, they WANT that same benefit, and the limited competition and lock-step pricing certainly points toward that. Imagine if Sprint says "all texting FREE!". What would happen?

 
At Monday, December 08, 2008 9:36:00 PM, Blogger Ted said...

Phil's analogy is in fact perfectly sound.

At issue is the difference between fixed and marginal costs. The important interaction in determining pricing is between marginal cost and demand, *not* total cost and demand. In both cases in the post, the service can be provided at essentially zero marginal cost; the marginal cost of sending a txt is close to zero, and the marginal cost of CR servicing a subscriber is close to zero. In both cases, there are substantial fixed costs; for txting, the construction of the network on which to transmit data, and for CR, the fixed cost is in preparing the research.

 
At Monday, December 08, 2008 11:30:00 PM, Blogger Brian Burke said...

The book Predictably Irrational devotes a long chapter to online vs print subscription prices. The author uses The Economist as a case study.

In general, there is a marketing scheme where you price something ridiculously high, not expecting many to take the offer. Then you offer that product combined with another for a slightly lower price. People gobble it up, thinking they're getting a bargain.

For example:

Economist online: $10/mo.
Economist print: $6/mo.
Economist print+online: $8/mo.

What a deal! Customers think they're getting a bargain for both products at $8, but really there is so little marginal cost in repackaging print articles for the web that The Economist makes out. The purpose of the $10/mo price for the online-only option is only to 'frame' the value of the product.

I'm not sure if CR is doing the same thing or not, but I wouldn't be surprised.

 
At Tuesday, December 09, 2008 2:07:00 PM, Blogger Tangotiger said...

Here is the scenario that Brian referred to:

[quote]You start your book off with an example of an offer for a subscription from The Economist that advertised an online subscription for $59, a print subscription for $125 and a print and Web subscription for $125. What's so telling about this?

Obviously, the $125 for the print and the Web subscription emerges as the best choice. But that's only because of what it's arrayed next to. The big idea there is that we don't know how much exactly we want to pay for different things, and context helps us figure it out. Our decisions are made on these relative local contexts that are available at the moment we make the decision. We go around feeling that we make decisions based on our preferences, but there's another big force there--the things that are next to those options. I think salaries are a good way to think about it. How much of your happiness with your salary is based on the absolute amount of money you earn, and how much is based on the amount you earn compared with how much you made last year, or compared to others in your profession? The moment you reflect on it, you realize it has less to do with the raw amount, and more to do with what you made last year and what other people around you are making.[/quote]

 

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