The Specialness of Zero
29 Pages Posted: 26 Nov 2019 Last revised: 8 Oct 2020
Date Written: October 8, 2020
A model is provided whereby a monopolist firm chooses to price its product at zero. This outcome is shown to be driven by the assumption of `free disposal' alongside selection markets (where prices impact on a firm's costs). Free disposal creates a mass point of consumers whose utility from the product is zero. When costs are negative, the paper shows that a zero price equilibrium can emerge. The paper shows that this outcome can be socially optimal and that, while a move from monopoly to competition can result in a negative price equilibrium, this can be welfare reducing. The conclusion is that zero can be a 'special zone' with respect to policy analysis such as in antitrust.
Keywords: zero price, non-negative price constraint, competition, monopoly, platforms, adverse selection, advantageous selection
JEL Classification: L11, L40
Suggested Citation: Suggested Citation