Game theory and pricing cell phone minutes

Why did business X follow strategy Y? While we rarely know the inside thinking, it can be fun to speculate. In the past, I have considered the motivation behind free samples (betcha can’t have just one) and price matching (surprise, this might not help consumers!).

Recently Rohnel emailed me to consider a news story regarding Tata Telecom’s pricing structure:

I am avid reader of your blog. I came across this article in an Indian news paper today.

–Tata Tele to charge per call, no matter the duration

Is there any game theory explanation for why Tata’s are ready to bill their customer per call and not per pulse [i.e. per minute or per second]?

Offering a per call pricing plan is a big shift. To get a sense of the change, one has to realize that many of Tata’s cell plans are priced per second. So to charge the same for 1 minute as for 2 hours is a revolutionary change.

Why would Tata introduce this duration-free plan? Here are a few thoughts and my guess.

Who wants this plan?

It’s important to consider the motivations of both sides. First, let us consider a consumer perspective.

Who would the per call pricing plan appeal to? It would not appeal to everyone, as a bit of logic will illustrate.

The plan would certainly not appeal to people who make frequent calls (like businessmen). These high-end customers simply make too many calls for this pricing to make sense. Additionally, they would likely want data plans and other perks such as free nights or weekends. So let’s rule them out.

This plan also does not appeal to people who make very few calls. These low-end customers use their cell phones sparingly and would do better off by paying per minute. They would not want to be charged on a call basis, as they would end up subsidizing the longer calls of others. They would stick to their per use rate system.

So who is left? This leaves people who are in between–they make a decent number of calls and they talk for a medium to a long amount of time. Perhaps these people talk for 3-5 minutes at a time. Note: this sounds like the profile of an average consumer!

And the weird part is, these average consumers don’t have a suitable calling plan. They either go through minutes too quickly on a pulse system, or they would have to spend extra to get a surplus in a post-paid plan.

Tata is capitalizing on the demands of the average, which is a sensible idea (as mathematically shown in Hotelling’s game).

The data

My guess that Tata targets medium use customers is backed up by some data.

I did some digging, and Tata’s per call rate is priced at the equivalent of a 2-3 minute call in a standard plan.

[To be specific, the per call has a rate of 1 rupee for local calls and 3 rupees for long-distance within India. By comparison, the local pre-paid plans are around 0.6 rupees per minute (1 paisa per second), and long-distance pre-paid calls are around 1.2 rupees per minute (2 paisa per second). The per call rate is the equivalent of a 1.67 minute local call or a 2.5 minutes long-distance call.]

The longer term strategy

Tata will do well by targeting the average consumer. This move will put pressure on competitors and perhaps expand its market share.

Additionally, Tata will have another advantage. Once customers become accustomed to making longer calls, it will be hard for them to change their habits. Tata can use this leverage and increase rates without losing customers.

[There is also the threat that Tata can drop calls more frequently as a way to increase the rate, but one would hope nothing this sinister will happen.]

What are your thoughts on Tata’s motivations? Will this pricing ever happen in America or other countries?