Innocent Until Proven Guilty -- Or Not: An Economic Review of Market Power and Price Fixing Allegations for Text Messaging Services

23 October 2008
By Christian Dippon

A fundamental shift in the US telecommunications industry's legal environment is underway. As US regulators take an increasingly hands-off approach to telecommunications matters, legal and policy disputes have moved into state and federal courts, typically in the form of consumer action lawsuits. Major litigation already surrounds issues like early termination fees (ETFs). Initially only levied against the wireless industry, claiming that wireless term contracts and the associated ETFs were unfair and unreasonable, similar lawsuits have now been filed against providers of other communication services, such as satellite TV and broadband Internet service. Consumer class action lawsuits also surround Apple's iPhone, ranging from complaints about the life of the phone's battery to allegations that the device should be portable from AT&T Mobile's network to other competing networks.

Alleged price fixing in mobile text messaging (SMS) is emerging as the next wave in telecommunications litigation. Last month, the Chairman of the Subcommittee on Antitrust, Competition Policy, and Consumer Rights of the US Senate's Judiciary Committee, Senator Herb Kohl, wrote to the CEOs of the four largest US mobile carriers demanding an explanation for price increases for mobile text messaging. Within a few weeks of Senator Kohl's letter, more than 20 consumer class action lawsuits had been filed against firms in the US wireless industry, alleging collusion and price fixing for text messaging services.

In this increasingly litigious environment, it is critical to look at the issues swirling around the telecommunications industry from an economic perspective, and evaluate them using rigorous economics. In this paper, NERA Vice President Christian Dippon takes a hard look at the economics of the text messaging issue. Based on information publicly available through mid-October 2008, the paper concludes that the claims of price fixing among the leading mobile carriers are incomplete, counterfactual, and unfounded. Competition in the US wireless industry seems to be healthy, and carriers compete on all aspects of their service offerings, including text messaging.