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How Small is Zero Price? The True Value of Free Products

44 Pages Posted: 14 Dec 2006  

Dan Ariely

Duke University - Fuqua School of Business

Kristina Shampan'er

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: October 2006

Abstract

When faced with a choice of selecting one of several available products (or possibly buying nothing), a standard theoretical perspective suggests that the option with the highest benefitcost difference will be chosen. This analysis applies to all prices including the price of zero. In contrast, we propose that decisions about free products are different than simply subtracting costs from benefits, and that in fact the benefits associated with free products are perceived to be higher. We test this idea by contrasting the demands for two products (types of chocolate) across conditions that maintain the cost-benefit difference for the goods, but vary on whether the price of the cheaper good in the set is priced at a low positive price or at zero. Contrary to a standard cost-benefit perspective, the results show that, in the zero-price condition, the proportion of participants choosing the less attractive chocolate dramatically increases, while the proportion of participants choosing the more attractive chocolate dramatically decreases. Thus, individuals seem to act as if pricing a good as free not only decreases its cost, but also adds to its benefits. After documenting this basic effect, we propose and test several possible psychological antecedents of the effect: Social norms, Mapping difficulty, and Affect. The results suggest Affect as the most likely source of the effect.

JEL Classification: C93, D40, Z0

Suggested Citation

Ariely, Dan and Shampan'er, Kristina, How Small is Zero Price? The True Value of Free Products (October 2006). FRB of Boston Working Paper No. 06-16. Available at SSRN: https://ssrn.com/abstract=951742 or http://dx.doi.org/10.2139/ssrn.951742

Dan Ariely (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
(919) 381-4366 (Phone)

Kristina Shampan'er

Massachusetts Institute of Technology (MIT) - Sloan School of Management

100 Main Street
E62-416
Cambridge, MA 02142
United States

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