Telecom pricing

Yesterday I sent an SMS to Pradeep, who lives in a village called West Lafayette in Amreeka. A couple of minutes later, I get an angry mail from him ?loser, why did you have to send that SMS? I just got charged 10 cents for receiving that! You should?ve mailed?.

It cost me Rs. 5 to send the SMS halfway round the world. And it cost Pradeep roughly the same to RECEIVE it. And he says he doesn?t have a choice NOT to receive it. In effect, if I can get a connection which allows me free international SMSs, I can ruin him!

It is widely said that in terms of pricing, the Indian telecom sector is one of the best in the world. Heavy competition and a large quickly growing market have resulted in one of the lowest prices in the world. If I use my Airtel calling card, I can call Pradeep spending less than he would if he were to make a local call in the US. We have truly come a long way from those days when we had to book trunk calls and were at the mercy of the DoT operator!

With reference to pricing, it would be useful to understand the economics of the telecom industry. Costs are mostly fixed, and go into setup and maintenance of infrastructure. The marginal cost of a telephone call is zero in most cases, and only when the network is congested is it equal to the opportunity cost of a dropped call. This allows telecom companies to fully exploit the elasticity of demand.

The zero marginal cost allows companies to equate profit maximization with revenue maximization. Thus, they can just go down the elasticity curve and price it at the point where price * quantity is maximum, without taking costs into account!

Now, the difference between the US and Indian markets is just that ? elasticity. The Indian market is highly elastic, and people here are extremely price-conscious. It was only after Reliance priced its calls at less than a rupee a minute (later partly replicated by other operators) that the industry here took off. People in India are even otherwise very price-conscious and are always on the lookout for the lowest price, and don?t mind switching operators to avail of it.

On the other hand, the US is a mature market, and except for Indians like Pradeep, most people there don?t seem to worry too much about the cost of a phone call, and the market there is quite inelastic. Basic economics explains that this leads to higher prices to the end customer.

Another reason telecom might be much cheaper in India is because complete unbundling has been achieved here. In the US, a telephone connection comes bundled with a handset and for a certain lock-in period, a code ensures that the two cannot function independently of each other. Bundling, as we all know, ends up pushing up the costs for a large proportion of customers.

Of course there are other things to look at such as the general price indices in the two countries and the skewed USD/INR rate. Still, the fact remains that India is one of the best markets for the telecom consumer.

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