Could a Plan to End ‘Bill Shock’ Backfire on Consumers?

NEW YORK (MainStreet) – The wireless industry, facing pressure from the Federal Communications Commission, agreed to take steps in fall 2011 to end “bill shock” – the consumer reaction to unexpected charges from exceeding text, voice and data limits. Under the announced plan, the major wireless carriers will start sending text messages to any subscriber who is about to exceed their plan limits, thus giving them the opportunity to scale back their usage before hitting the limit. The companies have agreed to start sending text alerts no later than Oct. 17, and the full system will be rolled out by April 17, 2013.

That’s great news for data hogs and chatty types who regularly exceed their plan limits and get hit with huge overage charges, but at least one analysis suggests that the majority of consumers could wind up being hurt by the new regulations.

Michael Grubb, an assistant professor of applied economics at the Sloan School of Management at the Massachusetts Institute of Technology, wrote in a commentary this week that the new regulation will likely mean that service providers will raise prices as they seek to recoup profits lost by the reduction in overage charges.

“It sounds like a terrific law that will help consumers, and it would if prices were to stay the same,” Grubb said in an interview Tuesday. “But they’re free to change their prices, and the result could be worse for consumers.”

That prediction is based on two pieces of research he has conducted to investigate the possible unintended consequences of the new regulation. The research shows that consumers will most likely see a combination of rate increases and service decreases – that is, reduced minutes, data or text allowances. He estimates that the combined economic impact of those changes on the average consumer will amount to about $25 a year.

The new self-enforcement regime is certainly a win for those customers who regularly exceed their plan limits, but much as the Durbin Amendment’s reduction of swipe fees led banks to implement new fees on checking account customers to recoup lost profits, the majority of cellphone customers could find themselves hurting a bit once the new “bill shock” regulation goes into effect.