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Does AT&T's New Data Plan Make You Think of an Israeli Daycare Center?

It did for a reader named Peter Rice. “I was recently reading about AT&T’s new service plans for the iPhone [see an overview here], and immediately thought of the story of the day-cares that started fining parents if they were late, and that the problem actually got worst.”
He’s referring to something we wrote in Freakonomics. It’s based on a paper by Uri Gneezy and Aldo Rustichini about a set of Israeli day-care centers which started fining parents who were late in picking up their kids. The problem was that the fine was so low (about $3 per occasion) that it backfired: late pickups actually rose, apparently because the new incentive (a cash fine) was weaker than the old incentive (the guilt of being late).
Peter continues:

My impression is that AT&T is currently getting a lot of bad press because its network can’t handle all of the data that the iPhones are trying to transmit over their network, so their pricing strategy is in response to that. Nonetheless is it possible that it will backfire? Are there a bunch of users out there that have essentially limited their usage because they realize that it bogs down the network and are limiting themselves basically by guilt? The pricing scheme seems a bit lopsided to me with a tenfold increase from 200MB to 2GB for just $10. Is it possible that some of those users will pay the extra $10 and then feel entitled to hog a lot more data? Or is there something about this scenario that makes it very different from the day-care situation, economically speaking?

  1. I’d be surprised if even a handful of phone customers have been feeling “guilt” about hogging too much data; raise you’re hand if you’re one of them; that said:
  2. The $10 incremental fee for so much more data does seem cheap enough to encourage some customers, especially new ones, to sign up and then, since they’re already paying for a vast amount of data, use much more than they might have otherwise. People eat more food at an all-you-can-eat buffet; they consume more health care with all-you-can-consume insurance plans; there’s no reason to expect they won’t gobble up more data too when they’ve already paid for it.
  3. On the other hand, more price-sensitive customers (or those who accept AT&T’s rhetoric that most existing customers fall far short of the heavy-data-user cutoff) will opt for the cheaper plan, which would limit their consumption.
  4. But the tricky part of a bright-line tiered pricing strategy is that it asks people to put themselves firmly into one box or another, rather than paying a la carte. And once you put people in a box of any sort, one of the first things they want to do is smash down the walls.