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Wireless Carterfone Proposals Would Raise Mobile Handset Prices for Consumers

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A Phoenix Center analysis has found that US consumers would pay higher prices for mobile handsets if the FCC were to regulate the custom of subsidising mobile phone prices the so called wireless Carterfone rules.

"It is ironic that proponents of wireless Carterfone tout their rules as being 'pro-consumer,' because our analysis shows that such rules would likely drive up the cost of equipment with little, if any, reduction in wireless service prices," said Lawrence J. Spiwak, President of the Phoenix Center and co-author of the study. "The pricing implications of wireless Carterfone are about as anti-consumer as you can get."

Carterfone regulation, named after a landmark FCC case in the 1960's, was originally implemented to prevent the regulated, vertically integrated Bell System monopoly from requiring customers to use only telephones provided by the Bell System. Those rules were largely lifted in the 1980's and 1990's for the landline telephone network as competition emerged, but several advocates have called for similar regulation to be applied to the U.S. wireless industry, despite the competitive nature of the wireless network environment.

The study develops an economic model that demonstrates that "early termination fees and handset locking rules directly increase the equipment subsidies that wireless firms provide to consumers. If such practices were eliminated or restricted by regulation, then one should expect to see handset subsidies decline, which would force consumers to pay a higher price for those handsets. At the same time, those higher prices would not necessarily be offset by lower per-minute wireless service prices."

"There is no free lunch," said George S. Ford, Chief Economist of the Phoenix Center and co-author of the study. "The typical consumer wants a free or very low cost cell phone, and mandatory wireless Carterfone rules would eliminate the incentive to offer such discounts. That will have consequences -- all consumers will pay higher prices, while only the few more sophisticated users would likely receive any benefit from such regulations."

"Handset subsidies have helped put cell phones into the hands of millions of Americans, especially low-income households," said Thomas M. Koutsky, Phoenix Center Resident Scholar and co-author of the study. "Given the high stakes, we urge careful study and analysis of the costs and benefits of proposed regulation that would limit or even eliminate those practices."

The full report (pdf file, 11 pages) can be downloaded from the Phoenix Center website.

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