Cell Phone Savings Calculator

How much cheaper must a 2-year agreement be for a cell phone user to sacrifice the flexibility of not having a contract?

$200, I remember that AT&T charges about this amount if I want to have a new phone without a contract. Now it's like a social norm.

To what extent does the secondary market for cell phones (e.g. eBay) alter the price comparison for no-contract plans?

Nowadays, customers are very reasonable and sensitive to a small price difference. $5 can be a game changer.

To what extent do major carriers differ in terms of the breadth and strength of their wireless networks? Are there any differences in terms of security?

Verizon highlights their coverage and AT&T leverages exclusive contract with iphone3 - most of the customers prefer to stay in one carrier for many reasons, for example, if they change carrier they might lose all contact information.

What does the FCC’s bill-shock agreement mean for consumers?

I've never heard about this agreement. As far as this agreement protects most of the customers from different carriers, it will not matter for customers. Most important attributes for customers are

1) Quality

2) Price.

How much cheaper must a 2-year agreement be for a cell phone user to sacrifice the flexibility of not having a contract?

It's not just price, it's whether you can take your phone with you. Can you unlock your phone if you break your contract? If yes, then (possibly, depending on network compatibility) not needing a new phone on a new carrier should factor in. This should also take into account whether people want to upgrade, what happens if your phone breaks, etc.

To what extent does the secondary market for cell phones (e.g. eBay) alter the price comparison for no-contract plans?

Phones are only now leveling off in terms of performance. So it's just recently that used phones are still quite capable, and it's just recently that very cheap and yet capable phones like the Moto E and Moto G have come about.

What does the FCC’s bill-shock agreement mean for consumers?

Bill shock is only a start. Another issue is misleading below-the-line fees.

What does the FCC’s bill-shock agreement mean for consumers?

In the short-run, the bill-shock agreement has very different effects for two groups of consumers:

(a) The agreement should have been very good for existing consumers when firms began offering alerts. Alerts help consumers avoid running up large overage or roaming fees unintentionally. Those who would have run up large overages may save a lot, while those who never use up allowances of minutes, texts, or data are neither helped nor hurt. The average benefits could be quite large. Although we have not had access to recent data to measure benefits directly, we have studied billing data for university students in 2002-2004. Our analysis predicts that had the policy been implemented then, holding prices fixed based on existing contracts, bill-shock alerts would have saved the average consumer about $100 a year on voice overage charges.

(b) The agreement is unlikely to be so beneficial for new customers, or customers switching plans when upgrading a phone or changing carriers. This is because carriers have changed their prices to try and make up for lost overage revenue due to the bill-shock agreement. Our research predicted that carriers would lower overage rates but raise monthly fees to offset the lost revenue. Since the bill-shock agreement went into force, many carriers now primarily offer unlimited talk and text plans with high monthly fees, consistent with this prediction. The carriers have essentially given up on making money on voice and text overage fees. However, they certainly haven't given up on making money, given the high monthly fees for basic plans. As a result, the average consumer may not be benefiting very much from the bill-shock agreement. Of course some consumers are benefiting a lot - those that would otherwise have been paying hundreds of dollars in overage fees. However many consumers are likely worse off, as the cheapest plans available are now often more expensive. We have not been able to evaluate the effect of the policy today, but our research predicts that had the agreement been introduced in 2002, some consumers would have saved money, some consumers would have lost money, and the average bill would have been about the same. Thus the primary benefit is reduced risk of large bills rather than savings on average.

In the long run, all consumers end up in group (b). This means that in the long run, the bill-shock agreement likely reduces the risk of very large bills but doesn't lower average bills because carriers can make up for lost overage revenue with higher monthly fees. To see average consumer bills decrease, our best hope is competition and we should cheer on the anti-trust authorities at the US Department of Justice for working to maintain competition in the industry.

What does the FCC’s bill-shock agreement mean for consumers?

In the short-run, the bill-shock agreement has very different effects for two groups of consumers:

(a) The agreement should have been very good for existing consumers when firms began offering alerts. Alerts help consumers avoid running up large overage or roaming fees unintentionally. Those who would have run up large overages may save a lot, while those who never use up allowances of minutes, texts, or data are neither helped nor hurt. The average benefits could be quite large. Although we have not had access to recent data to measure benefits directly, we have studied billing data for university students in 2002-2004. Our analysis predicts that had the policy been implemented then, holding prices fixed based on existing contracts, bill-shock alerts would have saved the average consumer about $100 a year on voice overage charges.

(b) The agreement is unlikely to be so beneficial for new customers, or customers switching plans when upgrading a phone or changing carriers. This is because carriers have changed their prices to try and make up for lost overage revenue due to the bill-shock agreement. Our research predicted that carriers would lower overage rates but raise monthly fees to offset the lost revenue. Since the bill-shock agreement went into force, many carriers now primarily offer unlimited talk and text plans with high monthly fees, consistent with this prediction. The carriers have essentially given up on making money on voice and text overage fees. However, they certainly haven't given up on making money, given the high monthly fees for basic plans. As a result, the average consumer may not be benefiting very much from the bill-shock agreement. Of course some consumers are benefiting a lot - those that would otherwise have been paying hundreds of dollars in overage fees. However many consumers are likely worse off, as the cheapest plans available are now often more expensive. We have not been able to evaluate the effect of the policy today, but our research predicts that had the agreement been introduced in 2002, some consumers would have saved money, some consumers would have lost money, and the average bill would have been about the same. Thus the primary benefit is reduced risk of large bills rather than savings on average.

In the long run, all consumers end up in group (b). This means that in the long run, the bill-shock agreement likely reduces the risk of very large bills but doesn't lower average bills because carriers can make up for lost overage revenue with higher monthly fees. To see average consumer bills decrease, our best hope is competition and we should cheer on the anti-trust authorities at the US Department of Justice for working to maintain competition in the industry.

How much cheaper must a 2-year agreement be for a cell phone user to sacrifice the flexibility of not having a contract?

There are a couple of different psychological factors at play here. The first is consumers often get used to a particular pricing method (i.e., having a contract in this case) and often come to expect it. This form of “psychological lock-in” makes a contract not feel like a tremendous burden to many consumers who come to expect this sort of contract via its predominance over a number of years. As well, while contracts certainly limit mobility, it isn’t clear that some consumers want to have the burden of making a cell phone decision more than once a year or once every couple of years, as there can be substantial learning costs involved whenever switching phones. In particular, those who don’t believe they are technologically proficient may want to avoid the costs of learning how to use the new features offered in a next generation phone. So again, contract may not be such a burden for many.

In terms of how much cheaper a 2-year agreement would need to be to outweigh the flexibility of not having a contract, I honestly don’t have a good guess on that. Based on the above line of reasoning I might conjecture “not much.” I suspect there are two segments, one that values flexibility and one that values price.

To what extent does the secondary market for cell phones (e.g. eBay) alter the price comparison for no-contract plans?

My take is the presence of a secondary market represents a classic form of price discrimination whereby the same good is marketed to different consumer groups (e.g., a high willingness to pay group and a low willingness to pay group) at different price points. Refurbished goods tend to be purchased by those who would not have otherwise bought a new phone due to the higher price of new versions. There is an interesting academic literature on used and refurbished goods, which suggests one reason why buyers don’t buy used/refurbished items is a sense of disgust generated by using a previously owned item. Not sure that directly applies to cell phones, but it might. Anyway, I conjecture that the secondary and primary markets cater to different customer segments.

How popular do you think Apple's "new iPhone every year" plan will be among consumers? To what extent will it impact the installment plans offered by carriers themselves?

Empirically, consumers are actually upgrading their phones less often when the data is analyzed longitudinally. When a new phone isn’t deemed substantially better than the current offering and represents a learning (as well as a monetary) cost, consumers will be hesitant to upgrade. If Apple charges $5 more per month for the ability to upgrade yearly, I sense only those who are concerned with being on the cutting edge of technology will value this plan.

How popular do you think Apple's "new iPhone every year" plan will be among consumers? To what extent will it impact the installment plans offered by carriers themselves?

People who enjoy spending money on consumption items are likely to prefer Apple's new iPhone every year plan versus that of the cell phone providers (except maybe Sprint's similar plan) because they get a new gadget every year. Such consumers are likely not as price sensitive as other segments and may also choose installment plans rather than paying a lump sum for a phone.

People who like to save money are usually wary of contracts because they end up costing more over the long term. Such individuals may be more likely to choose a higher price no-contract plan than consumers who are relatively less frugal. Savers may also prefer to pay a lump sum for a new phone rather than choose an installment plan.

How much cheaper must a 2-year agreement be for a cell phone user to sacrifice the flexibility of not having a contract?

I believe a lot of people sign a contract with the carrier not because they are not aware of the price difference, but rather the fact that a lot of the consumers are reluctant to spend a lump sum of cash in advance to pay for the phones. For example, for a family plan for a household of four, the price to purchase phones without a contract would cost around $2880 (two parents and two kids multiply by $720 per smartphone). This is a pretty big investment, considering that you still have to pay for the services in the long run. Another factor to consider is that the majority of consumers don't switch their carriers because of the price, but mainly because of the customer service, and/or network quality. So if the customers know a certain carrier can provide these qualifications, they wouldn't mind being bound with a two year contract. All in all, I don't think “how much cheaper” is what consumers are mainly concerned with when deciding to sign a two year contract or not.

To what extent does the secondary market for cell phones (e.g. eBay) alter the price comparison for no-contract plans?

Price-wise, I think the secondary market usually marks up by about 100 to 300 dollars depending on the sellers. That is the equivalent of a 20%-50% increase. But what comes with the high price is the flexibility of switching carriers with no extra costs.

To what extent do major carriers differ in terms of the breadth and strength of their wireless networks? Are there any differences in terms of security?

In terms of coverage and data speed:

Verizon: largest network in the U.S. (over 115 million subscribers), covers 497 markets with an average speed of 9.9Mbps.

AT&T: offers extensive international roaming (GSM), 2nd largest carrier (over 106 million subscribers), provides 4G/LTE in 291 markets in the US, with an average speed of 11.5Mbps.

Sprint: international CDMA (smaller than GSM), 3rd largest in the US, with a coverage of 110 markets.

T-Mobile: extensive international roaming, 4th largest US network (over 34 million subscribers) with an average speed of 14.1Mbps.

Not sure about the security.

What does the FCC’s bill-shock agreement mean for consumers?

I think the FCC's bill-shock agreement is definitely solid protection for consumers. Even though it is the customers' responsibility to monitor and manage their service usage, this bill-shock agreement serves as a friendly reminder to the users and a detection method to extreme cases where users were billed thousands or even millions of dollars without their awareness.

How popular do you think Apple's "new iPhone every year" plan will be among consumers? To what extent will it impact the installment plans offered by carriers themselves?

I think Apple's annual event is definitely exciting to the Apple fans. To this group of people, iPhone is not just a phone, but a luxury, fashionable accessory to have. They want to be the trend setters in technology in their social network. By constantly updating their phones, they can be further distinguished from the crowd. So instead of just saying I have an iPhone to your friends, you can brag about your newest iPhone 6s to those who may only have an iPhone 6 or 5s.

In terms of how it will impact the installment plans for iPhones, I think there are two types of people. One group of people, the innovators, who are able to afford new phones every year or those who are willing to spend a lot on Apple products will tend to pay off the phones in advance or choose payment plans with shorter periods like 12 months. The other group of people, the early adopters or the early majority, will respond to the new products slower, meaning they will prefer to wait for more than one generation to come out. So instead of buying iPhone 5, which only lengthened the screen, these consumers will want to see what the next generation will offer before they upgrade, leaving them content with the two year contract.