Unbundling Phones and Service

This article from the WSJ reports that cellular providers are reducing the subsidies for phones while reducing monthly charges.

SUMMARY: Apple faces a risky new environment this week as it unveils new iPhones, with carriers weaning consumers off subsidies for new devices.

CLASSROOM APPLICATION: Students can evaluate whether consumers evaluate new smartphone purchases based on only the total price over the lifetime of a phone of the wireless service plus the phone, or whether they respond also to the structure of the payments : the upfront cost and monthly payments. The analysis involves the marginal price of a smartphone, the discounting future payments and the possibility of behavioral explanations involved in the consumer evaluation of the pricing plans.

QUESTIONS: 
1. (Introductory) Compare the marginal price of a new smartphone under unsubsidized and contract-based plans. How does the marginal price of a smartphone affect the purchase decision?

2. (Advanced) A consumer can pay for a new smartphone upfront or can pay for it in installments. How does the consumer's discount rate affect this decision about paying for the phone?

3. (Advanced) Do subsidies of new phone purchases combined with greater monthly payments for service plans disguise the true price of the phone to consumers? Are consumers affected by this disguise?

4. (Advanced) How would the movement to unsubsidized wireless service plans affect the prices of the best smartphones?

Reviewed By: James Dearden, Lehigh University