GSM encryption crack made public

Posted Jan 8, 2010 17:59 UTC (Fri) by giraffedata (guest, #1954)
In reply to: GSM encryption crack made public by Baylink
Parent article: GSM encryption crack made public

And it's to protect carriers from fraud, which they will have to eat

They won't eat it. They'll charge it to the customers (i.e. fraud increases the cost of phone service). So what we can say about encryption is that it's partly to protect the customer (from a privacy standpoint) and partly to reduce the price of the service.

Re: "They'll charge it to the customers"

Posted Jan 9, 2010 4:05 UTC (Sat) by nybble41 (subscriber, #55106) [Link] (6 responses)

Producers almost never have the power to arbitrarily raise prices in response to increasing costs. Simply put, if it were possible for them to bring in more revenue by setting a higher price they would already have done so.

However, rising costs do have one noticeable *indirect* effect on prices: under some conditions they can nullify the profit margins of the marginal producers, thus forcing them to go out of business and reducing the overall supply of the good. At that point prices must rise such that supply and demand regain their balance. However, the change in price is typically less than the change in cost, so the rising cost is born in part by both the producers and the consumers, not simply "passed on".

Re: "They'll charge it to the customers"

Posted Jan 9, 2010 11:43 UTC (Sat) by nix (subscriber, #2304) [Link] (2 responses)

Simply put, if it were possible for them to bring in more revenue by setting a higher price they would already have done so.

Read Grossman & Stiglitz's _On the Impossibility of Informationally Efficient Markets_ and come back to us.

Re: "They'll charge it to the customers"

Posted Jan 9, 2010 18:13 UTC (Sat) by giraffedata (guest, #1954) [Link] (1 responses)

Simply put, if it were possible for them to bring in more revenue by setting a higher price they would already have done so.

But it's not possible because we have laws to prevent an industry as a whole from setting a price of its own volition.

I know why you're responding this way. It's because when someone says a company will just pass on its costs to its customers, 99% of the time he doesn't understand economics and is wrong because he's talking about a product with high elasticity of demand -- for example a product of a single producer in a competitive market. However, in this case, I know a great deal about economics and was actually talking about a product with pretty high elasticity -- wireless phone service overall. The costs of having GSM not be encrypted affects all the providers.

Certainly, the statement, "If Sprint loses this lawsuit, it will just pass the cost of the judgment on to its customers" is wrong.

Re: "They'll charge it to the customers"

Posted Jan 9, 2010 18:20 UTC (Sat) by giraffedata (guest, #1954) [Link]

Whoops, I said phone service overall has pretty high elasticity of demand; I meant low. The demand is pretty inelastic. You can raise the price of phone service (from all providers) and a lot of people will still pay it.

Re: "They'll charge it to the customers"

Posted Jan 9, 2010 18:05 UTC (Sat) by giraffedata (guest, #1954) [Link] (1 responses)

Everything you say is right and important, but I stand by my statement that the phone companies would pass the cost on to the customers instead of eating it.

First of all, I'm being approximate because the rise in price will not be the entire rise in cost; it will be somewhat less. This will cause there to be less phone service delivered (because some customers are priced out of the market), which will reduce costs to fill the rest of the gap.

But the more important part of my statement is that the producers won't eat the cost of fraud. It's a competitive market; the producers have no profits with which to eat it. The cost of fraud will be reflected in higher prices and less total service.

It's not true that if the industry could raise prices, it would do it even without the fraud. The competition among individual members of the industry prevents it from setting a price above cost.

Re: "They'll charge it to the customers"

Posted Jan 11, 2010 11:10 UTC (Mon) by cmccabe (guest, #60281) [Link]

Mobile-phone usage probably does have a pretty inelastic demand. I wonder what the demand elasticity is for things like data plans, though.

Re: "They'll charge it to the customers"

Posted Jan 12, 2010 9:42 UTC (Tue) by Cato (guest, #7643) [Link]

This is simply not true - consider the price of petrol, food, and many other commodities, which goes up at retail when the commodity costs go up. If retailers or producers didn't do this, they would go out of business, of course.