Monopolistic Telcos in Australia like Optus and Telstra charge enormous rates for their plans. A typical call is almost a dollar a minute in addition to a 30c “flag fall” connection fee. They do this because it allows them to use “caps” to give the perception of value.

Pay $50 for $500 dollars of value!

Bullshit. $50 will get you $50 of value, that’s the definition of value. Furthermore, telcos will charge these overpriced rates if a careless consumer goes over her cap. If you go over your cap,  you lose; be prepared to pay another couple hundred dollars on your next bill.  If you go under you lose the “value” you paid for but didn’t use. At best you can break even, and the odds are against you.

Here is a snapshot of Optus’ ridiculous pricing.

Ridiculous pricing structure, Aug 2009

For anyone who is too accustomed to this kind of pricing structure for mobiles to notice the peculiarity, imagine a grocery store who said,

Buy up to $200 worth of oranges for $10! <smallfont>Oranges are $5 each.</smallfont>

You rarely see this anywhere else but a mobile company.

A small player in the mobile market, Exetel has more realistic rates. The kind of prices that you would expect to see at a supermarket.

There, simple. You pay 25 cents per minute, no flag fall, reasonable data rates, no bullshit “value”. This is much better value than Optus prepaid rates (after you do the math).

Here is the surprise, ready? This service from Exetel uses Optus as the underlying carrier. That is to say, Exetel is an Optus mobile reseller! This is price discrimination.

A Microeconomics 101 Explanation

Under a typical demand and supply graph, the point at which [consumers] demand meets [telcos] supply sets the price and quantity sold. The utility (or value, or surplus, whatever you call it) for the consumer is the area above the price line(p0) and below the demand curve. This is because there are consumers who are willing to pay more than the market price for the service, so the difference between the price and the demand is excess value. The total value is the sum of all those differences. Similarly, the value to the supplier is the area below the price line and above the supply curve. Intuitively, the total utility is maximized at the price where demand meets supply.

Notice that with demand and supply curves of similar elasticity (gradient), the consumer surplus and supplier surplus are roughly equal. However, suppliers (usually monopolistic ones) can absorb consumer surplus by selling services at a higher price to those willing to pay more.

By selling different quantities (u,v,w,x,y) of the same product at different prices (p,q,r,s,t), the supplier can eat into the consumer surplus to maximize it’s own profits.

Searching For The Solution

This discrimination only works if those willing to pay more cannot get a better deal elsewhere, and are forced to pay the higher price. Thus, this works better for telcos if there are fewer competitors.

The solution then is not just more competition, but more competition on price. Businesses set themselves a part product differentiation where they sell services that are slightly different from one another which allow them to avoid competing on price and instead compete on those little differences.

Competing on price is expensive to business, but consumers win. We consumers have been losing against telcos for too long. The only way to win is to make decisions based on price to encourage price competition. The rediculous price structures allow telcos to compete with product differentiation by offering slightly different plans while making it a non-trivial task for us to work out the real value. This has to stop. Think, what can we do?