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  • Market Beats Government: Cell Phone Edition

    This month, Senator Herb Kohl (D-WI) sent a letter to the Chairman of the FCC and the head of the Justice Department’s antitrust division, asking them to investigate cell phone exclusivity agreements. Exclusivity agreements are arrangements between cell phone makers and service providers to allow one carrier the exclusive rights to sell a particular phone for a period of time. One of the major objections by Sen. Kohl and others was that these agreements disproportionately hurt rural Americans, and those who were customers of smaller carriers.

    Then, last week, Verizon Wireless announced that they were changing their policy. After six months, Verizon will allow small carriers (those with fewer than 500,000 subscribers) to sell the phones that it has the exclusive rights to distribute. Of course, those who favored a government solution were not impressed.

    What is this all about? With over 270 million cell phones in the United States, there is only a small market of new subscribers. Most carriers now compete by enticing their competitors’ customers to switch their service provider. The carriers work with phone manufacturers to develop new technologies and styles of phones to attract customers. This is what Verizon has done; this is what all carriers do.

    So why would Verizon do what it has done? It helps them compete in the market. First, Verizon’s arrangement would still give itself six months to attract new customers. More importantly, if Verizon’s move becomes the norm, it would hurt AT&T—Verizon’s main competitor. This is the market at work. AT&T has been, successfully, using the iPhone to attract customers and generate revenue. If Verizon can make shorter exclusivity agreements the norm, it can best its rival.

    This move by Verizon is evidence that the market is working. It is clear that there is no collusion amongst carriers. The cell phone industry is highly competitive, and provides a great service the to America people. So, unfortunately, before the government could step in to fix the problem, the market proved (again) its vibrance.

    Posted in Economics [slideshow_deploy]

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