How Much Does it Cost Part 2

The New York Times has an article on how cell phone contracts are priced.

HERE’S a consolation prize to the millions who recoil in bafflement from cellphone companies’ labyrinthine price plans, with their ever more intricate arrays of minutes, messages and megabytes: Economists don’t understand them, either.

In many parts of the world, the pricing of cellphone calling is simple. But in the United States, carriers offer multitiered plans.

“The whole pricing thing is weird,” said Barry Nalebuff, an economics professor at the Yale School of Management. “You pay $60 to make your first phone call. Your next 1,000 minutes are free. Then the minute after that costs 35 cents.”

To economists, it simply doesn’t make sense to make chatterboxes pay that penalty. After all, most businesses tend to give discounts to customers who buy more.

Read the rest at The New York Times.

How Much Does it Cost?

Have hidden fees made it harder for you to plan your budget? That is because prices have been secretly going up for years. What do I mean secretly? Rather than risking sticker shock when costs go up, businesses now tack on hidden fees, obscuring the real price of their goods and services. Once one company uses this strategy, competitors will appear to price themselves out of the market by being honest with their consumers. Some of the greatest culprits are cell phone service contracts, bank accounts and credit cards.

Bob Sullivan, author of Gotcha Capitalism, argues that hidden fees on everything from your cable and cell phone bill to your Internet purchases may be messing up the national inflation rate. Companies often don’t supply surcharges and fee data to the Bureau of Labor Statistics, so when it computes inflation rates, fees aren’t reflected. The result is that our national inflation rate is held artificially low.

Now Congress is taking a look at airline pricing. Hidden costs on airline tickets can sometimes exceed the “price” of the ticket, as I discovered last year. I tried to book a “$426” international flight and found that the additional “taxes and fees” were $528. That was not even including baggage handling fees and charges for in flight blankets, booking on line, booking in person, booking ahead, booking at the last minute, choosing an exit row seat, or trying to fly around the holidays and so on that the domestic carriers now charge. A la carte pricing doesn’t really make your flight cheaper, it just makes it seem cheaper, which is the airline’s goal.

The New York Times quoted John Tague, president of United Airlines saying, "We have been aggressive and creative." United collects about $13 in fees per passenger, or 30 percent more than the industry average.

The reason Congress is getting concerned is that calling a charge a "fee" results in lower "fares," which means the airlines pay lower taxes. The Consumerist reports that so far this year, U.S. airlines have taken in more than $3 billion in fees. If all those fees were subject to the same 7.5 percent excise taxes as fares, then the government would have at least $225 million more to distribute to airports for improvements and expansions.

Worst Case Scenario?

Mother Jones published feature by David Corn on Harvard Professor Elizabeth Warren. The article dubs her the "bank buster."

Warren is pushing a proposal to create a Financial Product Safety Commission to protect consumers from abusive lenders. Mortgages and credit cards, she wrote in a 2007 journal article about the proposal, "should be subject to the same routine safety screening that now governs the sale of every toaster, washing machine, and child's car seat."

The response from the banking industry has been predictable. They don't like the idea. An industry lobbyist, Bill Himpler, says Warren's commission would "take us essentially back to the 1970s, where we had... one-third the consumer credit available that we have now."

Would having less consumer credit be a terrible thing? If I understand this treat correctly, Himpler is saying, "if you don't allow us to take advantage of a few customers now, you'll hinder our ability to allow people to get in over their heads with debt, and no one wants that."