“The Oligopoly Problem” by Tim Wu in The New Yorker is a fascinating article to discuss with students, because the premise of the article is that oligopolies fleece the public, with T-Mobile as exhibit A, who at the time (2013) had just begun aggressively lowering prices on cell phone services.
It is a great irony that the T-Mobile story is cited as evidence that oligopolies are anticompetitive. But the author is right – for the first approximately 20 years of personal cell phones, the prices were high and the carriers were notorious for long contracts and steep termination fees.
So what changed to make aggressive competition the best move for T-Mobile after it had been playing along with the others for so long?
It can be difficult for oligopolies to act like a monopoly, charging high prices and treating customers poorly because if one firm offers better prices or better service they can steal customers from the others. The effect is that all the companies are pressured to act in a way that is more pleasing to customers. (This is an example of the prisoner’s dilemma problem.)
But in the early days of cell phone service, many new customers were buying their first cell phones, rather then switching from other carriers. That is to say, there was plenty of new market for the phone carriers and they did not need to concern themselves with stealing customers from other carriers. If this is the case, then we would expect to see market saturation around the same time as T-Mobile’s break.
Based on the graph above from the World Bank, in the two years (circled) before T-Mobile began its aggressive pricing strategy, the growth of cell phone plans had stalled at around 90-some cell phone plans per hundred Americans.
The Bureau of Labor Statistics index of wireless telephone service prices shows a modest decline in price after January 2013, and no major price fall until almost two years later. (Below in blue.) It makes sense that the average prices would lag, since T-Mobile is only one of several major cell phone service providers. It would take time for the other carriers to follow suit.
But here is the remarkable change: though the price fell precipitously in 2014, the market share of each carrier stayed about the same. See below:
T-Mobile edged in on Sprint a bit, but the price drop cannot be attributed just to T-Mobile’s (barely) increasing market share. Early in 2015, I got a call from Verizon (my longtime provider) informing me that they were cutting the price on my current plan by 40%. When I asked why, the representative informed me that they were trying to stay competitive and keep customers happy.
If increasing market saturation forced these firms to turn on each other, as the prisoners’ dilemma would predict, does this give us a framework to think about other new oligopolies? Just because an oligopoly is acting in a not consumer-friendly fashion in its early days might not be a reason to be concerned, as there will be more pressure to steal customers as the easier to acquire early adopters are already customers.