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Verizon Wireless - Price of Demand

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Introduction

Verizon Wireless is a joint venture between Verizon Communications out of New Jersey and the European-owned telecommunications company “Vodafone.” Verizon Wireless is a wireless communication carrier that operates in the continental United States. Currently, Verizon Wireless provides wireless communication services to over 60 million customers nationwide including customers in Hawaii and Alaska. Its products include wireless voice and data services using the largest wireless voice and data network in the United States. Cingular Wireless is currently the leading cellular carrier when it comes to amount of customers on its wireless network. However, as Verizon Wireless continues to grow its market share as the United States’ second largest wireless carrier, it ranks number one in total revenue collected as well as how it is viewed by Wall Street. Verizon Wireless’ strong market position, perception of quality, and its proportion of income has a strong competitive advantage that would allow a small price increase--making the demand inelastic, “quality demand stretches very little in response to price change” (McConnell et. al, 2004).

Verizon Wireless cellular service is inelastic because the products and services it offers makes them the dominant leader in the wireless industry; therefore, a 10% change in calling plan prices (monthly access fees) would not affect the quantity demanded. Verizon Wireless can depend on this inelasticity in their pricing model because of the strength of its brand and the wealth of products and services it offers. Verizon Wireless’ competitive advantage comes from its ultra-low churn rate (the percentage of customers who disconnect their service is less than one percent of its 60 million customer base). This indicator suggests that customers are satisfied with the service Verizon Wireless offers and a slight price increase probably would not drive its customers to the competition. This data also suggests that customers probably stay with Verizon Wireless because of its continued expansion of new technologies and services such as its all-digital nationwide CDMA network, ‘EVDO’ or its advanced data network (used to wireless send and receive email and other data almost anywhere in the US), and VoIP (Voice over Internet Protocol) that they use for their Push to Talk products. Verizon Wireless markets to a nearly all demographics nationwide and most of its services are offered in the smaller rural markets as a direct result of the one billion dollars per quarter it spends on improving its network as well as acquiring smaller wireless networks to make their nationwide network stronger and larger. Most customers agree that as the available services increase, a slight price increase is to be expected. However, to prove the ‘elasticity’ theory empirically, additional data would need to be analyzed. Therefore, one could effectively assume that a 10% increase in price would not change the quantity demanded.

The law of demand assures us that people buy more of a product when the price is reduced and they will buy less when the price is increased. Looking at the chosen product, “Verizon Wireless” cellular service, it must be noted that several determinants and considerations influence the elasticity of demand. Outlined is why Verizon Wireless service is inelastic, but what happens when the market changes? “If demand is elastic, a decrease in price will increase total revenue. Even though a lesser price is received per unit, enough additional units are sold to more than make up for the lower price” (McConnell et. al, 2004. p360). What we have to consider when looking at Verizon Wireless is the fact that they have more than one way to generate revenue. The first way was when we examined the voice minute plans or the monthly access fees, which could run from $39.99 to $209.99 or more per month. As we have already analyzed a 10% or even a 15% increase or decrease in monthly access price would not cause the product to become elastic.

Let’s now consider the available data products that Verizon Wireless offers and how a 10% fluctuation in price would have an elastic affect on the data product revenue such as Unlimited Messaging, which would have an affect on the overall total revenue. At this time, Unlimited Messaging costs an extra $20 added onto any Verizon Wireless Calling Plan. Would the total revenue go up if Verizon Wireless decreased its price by twenty-five percent? I would argue that it would not, because “the total revenue would decline because the loss

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