14. According to the Cahner\'s In-Stat Group, the number of the world-wide wirel

Question

14. According to the Cahner's In-Stat Group, the number of the world-wide wireless phone subscribers will soon reach the 1 billion mark. In the U.S. alone, the number of wireless subscribers is projected to grow by almost 17 million subscribers per year for the next five years. Contributing to the extensive growth are lower prices, larger geographic coverage, prepaid services, and Internet enabled phones. While the actual cost of a basic wireless phone is about $75, most wireless carriers offer their customers a "free" phone with a one-year wireless service agreement. Is this pricing strategy rational?Explain.

Explanation / Answer

Yes. It is consistent with cross subsidization. Phones and services are complements in demand. In addition, there may be cost complementarities and economies of scope since it is cheaper for providers to train employees to activate in-house phones rather than other brands purchased elsewhere. This strategy is also consistent with bundling. In this case, the company may say that the phone is “free,” but in actuality it is part of a bundle that cannot be broken apart. Both cross subsidization and bundling can be used to enhance profits.

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