Giving Away the Store: How the Zero Price Constraint Results in Fewer Add-On Features

Economics Bulletin, Volume 36, Issue 2, pages 983-992, 2016

11 Pages Posted: 11 Jan 2016 Last revised: 3 May 2018

See all articles by Ben Smith

Ben Smith

University of Nebraska at Omaha - Department of Economics

Date Written: 2016

Abstract

This paper discusses an issue impacting intellectual property products with nearly zero marginal cost: the zero price constraint. As established in the literature, aftermarkets result in a subsidization of the primary market, sometimes resulting in prices below marginal cost. While aftermarket add-ons are now common in intellectual property products such as software, the firms usually can’t charge a primary market price below zero. This paper shows that with the zero price constraint in effect, firms give more of the overall product away for free and pricing in the aftermarket is determined by the number of competitors in the primary market; despite assuming all consumers are initially unaware of the aftermarket’s existence. With the constraint in effect, consumers are better off and firms can potentially earn less profit.

Keywords: Aftermarkets, Bounded Rationality, Consumer Myopia, Add-Ons, Shrouded Prices

JEL Classification: L11, D83, L15, D43

Suggested Citation

Smith, Ben, Giving Away the Store: How the Zero Price Constraint Results in Fewer Add-On Features (2016). Economics Bulletin, Volume 36, Issue 2, pages 983-992, 2016, Available at SSRN: https://ssrn.com/abstract=2713198 or http://dx.doi.org/10.2139/ssrn.2713198

Ben Smith (Contact Author)

University of Nebraska at Omaha - Department of Economics ( email )

College of Business Administration
60th and Dodge Streets
Omaha, NE 68182
United States

HOME PAGE: http://bensresearch.com

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