Why are cell-phone plans so confusing?

The economic mysteries of daily life.
April 15 2006 7:33 AM

Confusion Pricing

Why cell-phone plans are so hard to understand.

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Illustration by Rob Donnelly. Click image to expand.

For nearly two months, a glossy magazine from my cell-phone company has been lying around the house. I took it with the express intention of choosing a decent calling plan, but so far, little progress. Occasionally, I pick it up and thumb it listlessly. I admire the colorful pictures but cannot get my mind around the different pricing options.

The permutations include on-peak, off-peak, in-network, out-of-network, joint accounts, "bundles" of this and that, and a variety of additional offers conditional on my signing some form of longer-term contract. The choice is bewildering.

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Usually, I have little sympathy for those who complain about the agony of having to choose. If the choice is important, such as when buying a house, then it's good to have the choice even between fine details. If the choice is not important, such as that between the 55,000 drinks alleged to be available at Starbucks, then few of us acquire gray hairs making it.

But the range of cell-phone tariffs isn't that kind of choice. All we're being offered is a number of different prices. Unlike the choice between the venti caramel latte and the small black coffee, the choice between "Any network anytime 200" and "Any network off-peak 1,000" is not a matter of taste. There's a correct answer and dozens of incorrect ones, and a computer armed with your phone bill and your company's pricing plans could work out, with hindsight, what you should have done.

With neither the computer nor the hindsight, you can end up paying far more than you should. You will also struggle to discern who is offering the best deals. So it's tempting to conclude that the confusion is deliberate.

Economists haven't had much to say about confusion pricing until recently. We find it hard to talk about the subject because the Vulcans who live inside our economic models don't get confused.

However, Eugenio Miravete, an economist at the University of Pennsylvania, has been studying how humans, not Vulcans, behave when choosing between confusing calling plans. His somewhat surprising conclusion is that customers don't leave much on the table. They are good at judging which calling plan will cost least, and good at switching if their initial guess is wrong.

I wasn't sure what to make of Miravete's research. It is limited by the availability of detailed data, so Miravete only studied the early days of confusion pricing, when the choice was between just two calling plans. My company offers 10, plus innumerable combinations of frills and top-ups. I face much more demanding calculations than the ones Miravete studied—hence my well-thumbed magazine and no decision.

But something strange happened after I read about Professor Miravete's intelligent, motivated subjects. I felt ashamed and was galvanized into calling my phone company. I spoke to a lady called Katie, who was very quickly able to tell me how much I was paying, and for what, before suggesting a couple of different plans that look likely to save me 10 or 15 pounds a month. Not bad for a five-minute phone call.

The whole experience suggests that confusion pricing is not really about trying to entangle every customer in an impenetrable web of complex offers. Instead, it's a very simple screening device to spot customers with money to burn. If you don't care enough about your phone bill to ask Katie for a spot of advice, then you can obviously afford to pay a little more.

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