William J. Polley

"The next question goes something like this. If text-messages take up so few resources, why do the cell phone companies charge so much for them? That's easy too. Price is not determined solely by supply, but by supply and demand. Apparently people think it's worth it."

That doesn’t sound so easy to me. In the competitive model, the long-run supply curve depends on the long-run average cost curve. I doubt that the long-run average cost curve for messaging services is significantly upward-sloping in the relevant range, so in a competitive market, you wouldn’t expect demand to have much impact on price on the relevant margin (except in the short run). Probably, there is monopoly power, which might cause the supply curve to be upward sloping, but I don’t think it’s easy to explain why that monopoly power exists in a market with several competitors.

I would describe the cell phone sector as an oligopoly. A few dominant firms in a given region getting most of the market share.

The competitive landscape of the cell phone sector is further complicated by the fact that the infrastructure (towers) are owned by those companies who may charge others to use their network. But that doesn't matter much for the analysis here.

The important thing is that they, like the airlines, base their pricing strategies on demand, not just cost. They offer a menu of choices to cater to different types of customers (price discrimination)--a favorite tactic of the oligopolist--just as the airline discriminates between business and pleasure travelers.

Look at the two-part pricing contracts offered by cell phone carriers and tell me that's not the sort of price discrimination you'd expect in an oligopoly industry.

The competitive model isn't even close to the right tool for this case.

I can see how it would be price discrimination, but that’s a much more complicated answer than just saying price is determined partly by demand. If you drew separate demand curves for text-messaging and voice-messaging, I bet the curve for voice-messaging would be higher. But since low-end customers are only willing to pay for voice-messaging, and aren’t willing to pay a whole lot for any service, the companies have to offer voice-messaging cheap in order to get those customers. Whereas the high-end customers are willing to pay a lot for either service.

I should have been more clear in the original. I did not mean to suggest the ordinary supply and demand competitive model. Rather, the commenters in the article I cited were suggesting that only cost (supply) mattered for pricing the service. Value to the customer (demand) matters too. How the firm captures that value is not too complicated (as a first approximation). But I should have said what I meant--price discrimination. Again, I was mostly just reacting to those who say that only cost should matter--and that the phone companies were gouging them!

I'm not sure if low-end customers are only willing to pay for voice. Casual observation suggests to me that might not be a valid generalization. Plus, if that was really true, I think the pricing schemes would be different.

Text messaging (with my provider at least) is simply an add-on that does not affect the price you pay for standard voice calls. What they are really capturing is that the value of text messages is, for some users (low-end, high-end, or in the middle), significant **on the margin.** That's a little different from your hypothesis.