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Wireless Phones Mean Landline Carriers Wire Less Homes
Subject Comparative statics
Topic Equilibrium
Key Words Consumers, technology, money, competition, price, deregulation, cash
News Story

More and more consumers are making cell phones their primary or only telephone line. In fact, 2.2 percent of people in the U.S. now depend totally on wireless phones and other technology. They calculate that it is a waste of money to pay for two phones when they are rarely at home anyway. Younger people, just starting out on their own, often see a cell phone with no landline service as economical.

Competition among wireless carriers has reduced the price of cell phone service by 39 percent over the last decade. Cell phone companies are also offering more plans that appeal to consumers. Some even mimic landline companies and offer free local service. Meanwhile, the landline providers have not seen any serious increase in competition, in spite of deregulation in 1996: new providers have preferred to serve business clients.

The likely growth in cell phone calls may cause problems, however. More airwaves and cell towers will be needed, but the airwave spectrum is limited, and cell towers are increasingly expensive for the cash-strapped companies. The construction of new towers is also being opposed by some community groups on aesthetic or health grounds.

(Updated May 1, 2002)

Questions
1. Draw a supply and demand diagram of the market for cell phone service. Show the effect of the following on the equilibrium price and quantity, and explain which determinants of supply and/or demand have changed:
a) more appealing cell phone plans
b) the increase in competition among cell phone carriers
2. In a supply and demand diagram of the market for landline phone service, illustrate the effect of the following on the equilibrium price and quantity, and explain which determinants of supply and/or demand have changed:
a) cheaper cell phone service
b) a realization that one is not at home very much and doesn't need landline service
c) a decrease in resources when moving out to live on one's own
3. Hyperion is hiring its own accounts payable employees now, rather than relying on external employees. Consider the determinants of the demand for labor, and explain why the demand for in-house employees might have increased, while the demand for external employees might have decreased.
4. Constraints on the airwave spectrum and cell tower construction are likely to increase the costs of providing cell phone service. Illustrate and explain how this would affect the equilibrium price and quantity of cell phone service.
Source Yuki Noguchi, "Cutting the cord," The Miami Herald, January 7, 2002.

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