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I think the real problem here is all the regulatory and financial barriers to competing in the telecomm arena. The free market has a hard time sorting itself out when there are so few players.

I don't have a solution to propose, but this is my observation.

This.

However, there is a difference between bulk, wholesale costs and individual retail costs, and prices. SMS is hardly the one and only example of high markup goods in history. Indeed, there are a plethora of entire industries in the same boat. Consider toys, many toys cost a few percent of their in-store retail prices, but again those costs are in bulk at wholesale. The same applies to batteries. And everyone knows about the huge markups in furniture and mattresses. The best advice is to find alternatives or shop around. If you just give in and accept the price that means you've declared you value the good you receive higher than the price you're paying for it (and in many cases SMS's are worth as much as people are paying).

Well, in most of the normal goods you listed, someone's free to sell good, cheap furniture or toys. Target's in business, as are smaller businesses. Telecom's a natural monopoly, which is prone to distortions -- in a normal market, you'd think competition would drive the price of texts down to free, right? It's finally happening but it took a long time. Essentially now it's just a hidden cost in the price, add in $15 to what's advertised for the unlimited texts.

Target is perhaps cheaper but they will still sell you die cast miniature toy cars at 1,000% markup.

Adam smith said that something is worth whatever a person at a particular time is willing to pay for it, there is no consistent, inherrent value in any given trade.

SMS is popular because it is ubiquitous, the mobile phone networks have priced it at a point where the vast majority of users are happy to pay for it. There is no law against high profit margins, nor should there be in my opinion. You could argue there is a competition/monopoly/cartel issue here, but that wasn't too apparent in the article.

And as others have said SMS will eventually go away due to the availability of data plans. I wish all my friends had data plans and were on twitter, I would never need to send an SMS again, until then I can afford it, especially since I don't send very many.

Get Google voice, and port your existing number for $20. It doesn't do MMS, but MMS alone isn't worth the cost of keeping a texting plan.

In France you have 3 main players (and some little ones using their networks, but that doesn't really count). They were already condemned for some "secret" agreements on prices (http://www.cellular-news.com/story/15060.php).

A fourth operator is in process of entering the market, but it has had a lot of difficulties already. The 3 main actors really did all they could to slow the process down and even try to have the government refuse the license to the new one.

Their main reason? The new "challenger" is Free.fr. These are the same ones who pulled the internet market in France. The ones who came and proposed a free dialup access (minus communication costs), when all other actors were still on "3 hours + comm costs" kind of deals. The ones who pushed the ADSL market to lower prices for more service, and introduced the concept of "triple play" (you get a special router from the ISP, and you get free TV and phone calls added to the regular internet) ( http://fr.wikipedia.org/wiki/Freebox , the English page is lacking, though ). They forced the other actors (roughly the same ones as the mobile telecom) to come up with the same offers for about the same prices.

So that's why they did everything they could to prevent Free from entering the mobile market. By fear of the same kind of thing happening.

Free.fr managed to get their license though, and are in the process of establishing their antenna network. So we will see what will be, when they will really start, and announce their mobile deals.

Exactly.

Phone operators are NOT a free market. In every country, operators are heavily regulated and only three or four operators form a majority.

That's the right track. http://en.wikipedia.org/wiki/Economic_cost

Calculating marginal cost+a portion of fixed cost tells you what it costs the cell carrier. But that's the wrong side of the equation to be looking at.

Mkt transactions happen when the cost of something overlaps with what someone is willing to pay for it.

And exactly how much someone is willing to pay for something is defined as the value of their next best alternative. In the case of texting, it could be the hassle of setting up all their friends WhatsApp, or typing in email addresses into their contact book, or something like that. (Also throw in a wee bit of behavioral economics, time discounting etc ) And that's why you get a bunch of people (myself included) willing to pay the $5 or whatever a month for unlimited SMS.

Also to clarify usually when people try to measure "how much you are getting ripped off" they are looking at the difference between the two sides of the equation above (cost, and price-what you pay) which is not always the best way to do it but it does give some indication of consumer/producer surplus. You might feel like you're getting ripped off but that's a judgment call are you really? You currently pay $5 a month for unlimited but I bet you'd be willing to pay 6 or $ if you had to. So really you are getting a deal, saving yourself at least $2 a month what they could be charging you if they knew your max reserve price.

>The common rebuttal is: "You are making the mistake of calculating on the Margin, you forgot to calculate E Fixed Costs"

An even better rebuttal is: "Price is not: (what it costs) + 1, it is the perceived value of the product/service. Costs have nothing to do with it besides deciding the pricing floor".

In an economics textbook, yes. But in reality people have a notion of fairness, and this influences behaviour. For example, see this American Economic Review paper: http://www.lrz.de/~u516262/webserver/webdata/rabin1993_incor...

Anecdotally, this kind of what-it-costs consideration certainly influences my behaviour.

For instance, Easyjet doesn't pre-allocate seats on its planes, and offers 'speedy boarding' for something like £15 ($25). This means you get to board before those who didn't buy it (and, incidentally, sets up a game theoretic-type problem, in that it's only worth buying if enough others don't buy).

Irrespective of the value of this to me, I on principle never buy it. In fact, the very fact that they offer to take £15 off my hands for something that's transparently and utterly free to them lowers my opinion of them as a company.

(Note: obviously the price is set to engineer scarcity -- it wouldn't work if they charged £1 -- and from a rational/economic perspective it's a brilliant little wheeze).

This. The glaring assumption of economics is that people are rational. We are not, entirely.

I remember arguing extensively with a friend about this.

Whenever I switch plans, I demand free, unlimited SMS (local and international), and it doesn't take much bargaining to get it. This friend of mine from another country had to pay to receive text messages from anyone (myself included at a premium, for texting him from abroad), which I consider downright apalling.

I told him to negotiate a better deal or to switch providers because he was being blatantly ripped off, and no: he argued quite religiously that doing so would be promoting low standards, and that commodizing his phone service was the last thing he could ever possibly want (no further reason given).

When I argued that I was just trying to be helpful, he accused me of being a nonconformist (as if the expression is inherently derrogatory) and started ranting about how little grasp of economics I have. (At which point I lost my temper to because, as XKCD quite nicely has it [1], someone was wrong on the internet.)

[1] http://xkcd.com/386/

Hello, I am curious what kind of leverage you had while negotiating free SMS. How much do you pay per month? Also, how do frame your request / get to speak to the right person?

On your front, you have leverage because you have options. (Well, assuming there is a reasonable number of carriers in your region.) In terms of demand, by default, they want you more than you want them, especially if you're switching carriers like I was, in which case your BATNA is not to switch.

On their front, they need to generate demand for their service. If by offering me for free something which has zero marginal cost to them they can achieve so, then of course they'll do that.

I was very explicit about that: I didn't want a new carrier, I wanted a carrier which offered me free SMS. If they didn't have that, I bid them a good day.

It was no use trying to buy that plan at the store, and it did take me a couple calls to the same carrier to get everything as I wanted.

There were a couple other perks I wanted, but those were negotiated into a non-refundable monthly floor payment + additional charges if I exceeded my quotas.

The plan (serving two people) had: 1 GB 3G internet access, 500 minutes/month of calls shared between me and my s/o, plus another 500 minutes/month for calls from one of us to the other. National long distance calls charged local call prices. Any excess in minutes or GB is charged additionally.

This makes for R$ 140/month (R$ 70 each). With wi-fi becoming increasingly fast and hotspots increasingly common, this was probably a bad deal on the long term. I guess you should never bet against people who know their trade. :-)