Verizon’s New Data Rates and Economic Efficiency

Starting tomorrow, Verizon Wireless will do away with unlimited data plans for mobile phone customers, and instead switch to a tiered system of premium data pricing for data-intensive bandwidth hogs on its 3G and 4G networks. (Hat tip: Rachel Dodsworth)

Boston.com reports:

The days when cellphone users could get all the Internet, video, and downloads they want for a flat monthly fee are fading, as Verizon Wireless becomes the latest cellphone carrier to do away with unlimited data plans.

Beginning tomorrow, Verizon Wireless, the nation’s second-largest wireless carrier, will cap the amount of data downloads allowed under its $30-a-month wireless broadband plan; it will also unveil more costly options for users with big appetites for digital data.

The changes will affect only new customers. Customers who now have unlimited data plans, or who sign with Verizon today, will be able to continue paying a flat fee for all the data they wish to download.

Verizon follows the country’s number one carrier, AT&T Inc., which did away with unlimited data plans last year. The smallest of the nation’s top four cellular companies, T-Mobile USA, still offers an unlimited service, but the company dramatically slows down data transfers for heavy users – in effect, imposing a speed limit instead of a usage quota. Of the top wireless companies, only Sprint Nextel Corp. still offers unlimited data plans.

The trend follows an explosion in the amount of digital information sent and received as more people buy devices like Apple Inc.’s iPhone and smartphones running Google Inc.’s Android operating system. With limited network capacity, cellphone carriers can discourage heavy usage by placing caps on data transfers and charging more. “What we’re trying to do is streamline our data plan,” said a Verizon Wireless spokesman, Howard Waterman.

Limited plans “will certainly affect consumer behavior,” said Craig Moffett, a cellular industry analyst for Sanford C. Bernstein Co. in New York. “If it’s going to cost more for the consumer to watch a video, they’re going to think twice before they click on that link of the squirrel on water skis.”

I saw a few groans on Twitter when I first shared this story, but this isn’t a bad thing. Verizon can only supply a limited amount of mobile bandwidth on its 3G and 4G networks — just like a 12-volt battery can only supply a limited amount of power. When many users with no barrier to their consumption of data — or at least no barrier above a $30 per month fee — they have in effect incentives to over-consume the limited resource. This is a classic collective action/tragedy of the commons case, and the fact that, at $30 per month, Verizon’s network experiences strain from lots of data-hungry consumers, the current pricing system is inefficient.

I suspect that the pervasiveness of mobile video is probably the cause of this problem generally — and mobile video probably wasn’t as prevalent in the marketplace as it is today when Verizon originally designed its pricing scheme. But the addition of both the iPhone and the iPad to Verizon’s suite of devices, including wireless modems, probably adds additional strain to their network.

One of the ways economists suggest dealing with inefficiencies like this — in the allocation of Verizon’s bandwidth across its customer base — is congestion pricing. As a matter of public policy, we usually talk about this in terms of metered parking spots, or tolls on major highways. Here’s a great video primer on the basic economics of congestion pricing:

But there are other technological applications of congestion pricing with which most of us are already familiar — cable subscribers pay a premium over and above a basic cable package to receive HBO, and in-home high-speed Internet users pay a premium over and above a standard 1mbps connection if they want a 3mbps, 10mbps, or 20mbps connection.

I know, I know — an increase in prices is inconvenient, and we don’t like paying more out of pocket each month. But the alternative — stagnating prices in the mobile industry — is a package of cost-cutting measures on the provider side that ultimately lead to poorer service — just ask an AT&T customer. With congestion pricing, Verizon can restore balance to the distribution of its proprietary bandwidth, especially during peak hours, and can more effectively innovate and develop its networks.

Disclosure: I have been a Verizon Wireless customer for eleven years, and will be grandfathered into the group that retains the unlimited data portion of existing plans.