The Specialness of Zero

29 Pages Posted: 26 Nov 2019 Last revised: 8 Oct 2020

See all articles by Joshua S. Gans

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: October 8, 2020

Abstract

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

Gans, Joshua S., The Specialness of Zero (October 8, 2020). Available at SSRN: https://ssrn.com/abstract=3486964 or http://dx.doi.org/10.2139/ssrn.3486964

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

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