Comment Re:Failed economics class (Score 1) 570
Economic theory states that as the number of competitors approaches infinity, then the price will equal marginal cost. After a certain point, the difference between the price and the marginal cost will be small enough that it doesn't matter, but 4 is not really close to that point.
Your analysis also requires very limited barriers to entry/exit. The current cell providers are experts on creating barriers to entry - for example, restrictive 3-year contracts that prevent the customer base from migrating to a better provider.
Other commenters are right: the price is based on supply as much as demand. However in this case the main determinant of the supply is the price since other factors are negligible (things like labour or other input costs). The price will be determined by demand - which, I may add, is rather inelastic given how addictive text messages are.
Of course, the economic analysis of text-messaging services is much more sophisticated than the back-of-napkin stuff we have here. Maybe we should stop applying introductory economics courses to where they do not belong.
Your analysis also requires very limited barriers to entry/exit. The current cell providers are experts on creating barriers to entry - for example, restrictive 3-year contracts that prevent the customer base from migrating to a better provider.
Other commenters are right: the price is based on supply as much as demand. However in this case the main determinant of the supply is the price since other factors are negligible (things like labour or other input costs). The price will be determined by demand - which, I may add, is rather inelastic given how addictive text messages are.
Of course, the economic analysis of text-messaging services is much more sophisticated than the back-of-napkin stuff we have here. Maybe we should stop applying introductory economics courses to where they do not belong.