South-Western College Publishing - Economics  
VOIP Me Tonight, Okay
Topic Supply and Demand
Subject Consumers are switching from standard land lines to internet phone lines.
Key Words internet, VOIP, telephone, price.
Full Article

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Reference ID: A147735812

News Story In 2005, more than 5.5 million consumers subscribed to internet-based telephone lines-three times as many as subscribed the year before. By 2010, the industry projects that over of U.S. phone users will use the Internet to place phone calls. The downside? This year, landline usage fell by 150,000 calls per week.

While Internet companies make significant inroads into traditional telephone markets, the news isn't as bad for telephone companies as it may seem. While landline usage fell by 150,000 calls per week, some of those 150,000 calls simply moved over to cellular phones, which may well be owned by the telephone company. Further, telephone companies own some of those broadband Internet access providers-so despite the loss of landlines, the phone companies still reap subscription fees (which are typically higher than just phone bills).

Still, competition from cable TV companies and other high speed Internet access companies is enough to make the phone companies sweat: Verizon reduced the price of its unlimited phone service in New York from $60 per month to just $35. AT&T offered its Web site customers a drop from $50 to $40 over the course of last year.

Why are phone service prices falling? Clearly, competition enters into the picture-and competition was unheard of (pardoning the pun) during the Ma Bell monopoly days. Economists would draw graphs to show how prices today are approaching those in a perfectly competitive market with many sellers. It's also becoming increasingly cheap for firms to offer basic voice communication services along with Internet access, cellular technology, or other, more expensive services. Some analysts look for the day when phone calls are "free"--or at least basic phone service is free when bundled with other, more expensive, additional services.

Discussion Questions:
1. According to the article, basic telephone service may one day be free. Can there ever truly be a "free good?" Why or why not?
2. If basic phone service is free, it could be considered a "loss-leader" in the market for communication services. What does it mean to be a "loss-leader"?
3. Take a survey of your classroom to determine how many students still have traditional landlines, how many use VOIP technology, and how many use cellular phones as their primary source of communication. Discuss how your results compare with what is discussed in the article. Do you think that demographics affect the need for landlines? Explain.
Multiple Choice/True False Questions:
1. According to the article, the price of traditional telephone services is falling because of:
  1. Decreased demand for landline services.
  2. Increased demand for landline services.
  3. Decreased supply of landline services.
  4. Increased supply of landline services.
2. Overall usage of Internet-based telephone services is increasing because:
  1. Supply has risen as costs fall and more sellers enter the market.
  2. Demand has fallen.
  3. Demand has increased through cell phone use and other factors.
  4. A and C
3. According to the article, if both price and quantity of internet-based telephone services have increased, it must be because:
  1. Demand is increasing faster than supply is increasing.
  2. Supply is increasing faster than demand is increasing.
  3. Demand is falling faster than supply is increasing.
  4. Supply is increasing faster than demand is falling.
Source Richtel, Matt and Ken Belson. "More Consumers Use the Internet to Place Calls." The New York Times. July 3, 2006.
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