Not created equal

Graeme Rhook
Telecom Asia

In his seminal paper published in 1977 titled Nonlinear Pricing and Welfare Michael Spence demonstrated that a telecom regulator could maximize the benefit to society or a telecom supplier could maximize profit by using particular pricing structures he termed non-linear pricing.  During the '70s and '80s the economist and his colleagues conducted an extensive research program on nonlinear pricing, which was encapsulated in Robert Wilson's book Nonlinear Pricing published in 1991.

The research program that Spence made such an important contribution to, however, is almost totally ignored by the telecom sector, except for the core tenet that profit cannot be maximized by using a simple variable price.  With competition has come an explosion in the types of pricing structures employed across different telecom markets. Fixed voice structures are different in each country, and within countries the pricing structures across fixed and mobile, voice and data services are rarely the same.

This evolution in pricing complexity might be explained by a simple Darwinian principle, but it is not the principle most commonly associated with Darwin's theory - the so-called "survival of the fittest". 

Darwin appealed to two drivers in the evolutionary process.  One related to interaction between species and the environment. The second related to interaction within a species where individuals compete to attract a member of the opposite gender in order to reproduce.

Without the second principle Darwin was at a loss to explain the peacock's tail, a complex adornment that clearly did not assist in the competition with other species for the finite resources available in the environment. However, with the notion of sexual competition Darwin's theory could explain the peacock's tail through a process sometimes referred to as runaway sexual selection. Males with more exotic adornments reproduced.

A prime example of a peacock's tail in telecom pricing is the evolution of pricing propositions in the Australian mobiles market.  In the early stages of competition standard offers were $40 per month, with $40 of included calls with modest underlying call rate.  After the arrival of the fourth competitor. so called capped offers were introduced  -  typically $49 for $250 of included calls but of course with a not quite so modest underlying call rate.  Some of these offers were even advertised as $49 = $250 - on the surface a false proposition.

A more recent entrant in this market has introduced the metaphorical peacock's tale: $49 for $1,000 of calls. 
The exotic variation in pricing structures that has resulted from the "sexual" competition within each micro-market within telecom would be a benign feature of the industry if there were no systematic relationship between the profit that might be secured and the particular type of pricing structures that are employed.  However, this is not the case.



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