Wednesday, June 9, 2010

NewsFlash: AT&T changes its pricing policy on internet usage---complements and substitutes go crazy!!

Two recent articles on AT&T's decision to stop their unlimited usage plan on data downloading illustrate the economic concepts of COMPLEMENTS and SUBSTITUTES.  Complements are two different goods/services that can stand alone BUT are often (sometimes required) used together and a change in the price of one can affect the demand for the other good/service.  For example, if the price of "Good A" increases then the demand for "GOOD B" decreases ("Good B" becomes less desirable).  There is an inverse relationship between the change in price of one good and the demand for the complement.  This is the situation in regards to AT&T.  AT&T's plans are going to increase the price of internet access depending on your usage.  The first article discusses how Application writers fear a decrease in demand for their "Apps" because customers may, rightly or wrongly, assume that the app will cost them more.
""Some software developers fear they will, and if that happens, the caps on data use that AT&T has imposed could also make consumers lose their appetite for the latest innovations. Some developers worry that customers will be reluctant to download and use the most bandwidth-intensive apps and that developers will cut back on innovative new features that would push customers over the new limits.""  NYTIMES 
The second article discusses how cable-operators see this as an opportunity.  In this case, wireless downloads and hard-wired cable companies, like Time Warner, Charter, etc. are SUBSTITUTES.  When the price of "GOOD A" increases and the demand for "GOOD B" increases, this signals that these to goods/services are SUBSTITUTES.  There is a positive relationship between the price of one good and the demand to for another.
""AT&T Inc.'s decision to shift its wireless-data pricing to a usage-based model may have upset lovers of mobile media, but it's music to the ears of cable executives. The move away from unlimited Internet-data plans by the second-largest U.S. wireless carrier after Verizon Wireless could push more customers to watch videos and stream music through their wireline-broadband connection at home—an area dominated by cable operators—rather than through wireless cellular networks."" WSJ
The end result of AT&T's decision potentially has adverse affects application writers and potentially benefits cable companies. This type of economic analysis is important to recognize.  It helps forecast behavior by businesses and customers....
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