People Are Hanging Up on Pay Phones For Good
Subject Assumptions, comparative statics, and shut down condition
Topic Perfect Competition
Key Words Consumers, prices, revenue
News Story

People are discovering that the pay phones they are accustomed to using are disappearing. Over the last three years more than 300,000 pay phones have been removed, leaving approximately 1.9 million. Usage is down from 700 calls a month to 500 on average as wireless phone use has skyrocketed. In 1990, 4 million cell phones were in use; 28 million in 1995; and 110 million today. Little surprise that BellSouth has announced that it will take out its 143,000 pay phones over the next two years.

The reasons for these trends are several. For consumers, cell phones are much more convenient. They can be used anywhere and do not require coins or credit cards. Pay phone prices have climbed at the same time. In addition, some neighborhoods are calling for pay phones to be removed because they are magnets for crime.

For the 2,000 companies providing pay-phone service, the reason is economics. To justify a pay phone, daily revenue needs to be at least $7. However, not only is usage down, but also the pay-phone operators collect only two-thirds of what they are due from non-coin calls made using calling cards, prepaid cards and credit cards. They are also charged heavily for local line access.

While there will always be a need for pay phones in some areas where cell phone use is difficult or people do not have cell phones, the heyday of the pay phone is over. Some companies are now trying to reinvent pay phones to provide Internet access.

(Updated March 1, 2001)

1. Why does the pay phone service industry resemble perfect competition?
2. Draw two diagrams side-by-side, one of the supply and demand for pay phone calls, and the other showing a representative perfectly competitive firm's average total and marginal cost curves. Mark the equilibrium price and output in each diagram and shade in the amount of profit earned by the firm.
a) Show the effect of increases in local line access charges on each diagram. What happens to the equilibrium price and output in the industry and the firm? What happens to the firm's profit?
b) Now add in the effect of the reduction in demand for pay phone calls resulting from the greater use of cell phones. Again, show the implications for price, output, and profit.
3. a) What is the minimum average variable cost for the average pay phone? How do you know this figure represents minimum average variable cost?
b) Why should pay phones be removed if they fail to cover minimum average variable cost? Why not just leave them in place and attract whatever consumers it is possible to attract?
c) Where on your diagram would the minimum point of the average variable cost curve be if the company was to remove all its pay phones from service?
Source Rick Hampson, "Pay phones vanishing as cellphones take over," USA Today, February 8, 2001.

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