Living Economics

Captive Customers
Prison inmates must pay much higher fees for using pay phones installed by exclusive phone carriers chosen by the state.

When buyers must buy from a monopolist seller, they become captive customers. Prisoners are literally and figuratively captive customers when it comes to making calls to the outside world from their cells. The state chooses the phone carriers that offer it the highest commission. Inmates are allowed to make only operator-assisted collect calls from pay phones installed in prisons. And these calls are a lot more expensive than similar calls placed outside prisons.

For example, long-distance collect calls from pay phones in state-run prisons cost about 50 cents per minute, on top of an automatic $3 surcharge for each call. By comparison, people outside prisons typically pay 8 to 55 cents per minute for a long-distance collect call, plus a $2.25 to $3.25 surcharge for operator assistance. Most people can avoid the high end of the per-minute charge by choosing when and where they place their calls. But inmates do not have that option.

In California, MCI pays the state 44 cents per dollar it collects on prison calls. Although the state gets a commission percentage from all phones on state property, the per-minute rates and surcharges are much higher in prisons. In fact, the state gets 75% of its pay-phone revenues from prisons, even though they represent only 25% of the total phones on state property.

It should be pointed out that airports, hotels, stadiums and highway rest stops have also entered such exclusive fee-splitting arrangements with phone carriers at the expense of phone users in these locations. But, only in prisons are phone users truly captive customers.

The lack of alternatives for captive customers in effect artificially reduces their demand elasticity for monopolistic services. Monopolistic sellers naturally price discriminate to increase profit by charging higher prices for captive customers with more inelastic (or less elastic) demand.

Note:
  1. Update: 3/20/2015. New FCC rules have reduced call rates in prisons by 25% to 50% since February, 2014. Time. 2/12/2014. "Prison Phone Calls Will No Longer Cost a Fortune." (http://time.com/6672/prison-phone-rates/).
  2. Update: 3/20/2015. New FCC rules have reduced call rates in prisons by 25% to 50% since February, 2014. Time. 2/12/2014. "Prison Phone Calls Will No Longer Cost a Fortune." (http://time.com/6672/prison-phone-rates/).
References:
  • Solomon, D. "Heavy Toll on Calls from Prison," San Francisco Chronicle. 6/14/1999.
  • Brown, J. "Prison Pay Phones Gouging Inmates on Calls, Critics Assert," Chicago Tribune. 10/14/1998.
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