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Priced and Unpriced Online Markets

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  • Benjamin Edelman
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    Abstract

    Some online resources are free and others are not -- but it can be hard to predict which resources are in which category. In some cases, users are charged for things such as web-based e-mail, wireless Internet access, and software, while in other cases, they aren't. Zero prices offer important benefits, even relative to small positive prices. For one, fee-free access reduces transaction costs -- eliminating the need for billing systems as well as, in many cases, account setup, usernames, and the like. Furthermore, zero prices seem to create an environment of experimentation and progress for products and consumers. Finally, consumers overwhelmingly favor zero-price products, even beyond what might be predicted by their ordinary efforts to maximize consumer surplus. Yet experience in other contexts offers cause for concern. Although marginal costs may be near zero for many levels of use of online resources, costs generally eventually increase as usage nears a capacity constraint given by technological capability or system design. More generally, experience in other contexts repeatedly reveals overconsumption, scarcity, and even hoarding when resources are provided without charge. With competing forces both supporting and opposing zero prices, typical Internet-related activities -- like surfing the web, web searches, and e-mail, along with behind-the-scenes practices like domain names and the allocation of IP (Internet protocol) addresses -- present a natural context to reevaluate our sense of the tradeoffs that arise between free and a positive price.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.3.21
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 23 (2009)
    Issue (Month): 3 (Summer)
    Pages: 21-36

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    Handle: RePEc:aea:jecper:v:23:y:2009:i:3:p:21-36

    Note: DOI: 10.1257/jep.23.3.21
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    1. Parry, Ian, 2000. "Comparing the Efficiency of Alternative Policies for Reducing Traffic Congestion," Discussion Papers dp-00-28, Resources For the Future.
    2. Kristina Shampanier & Nina Mazar & Dan Ariely, 2007. "Zero as a Special Price: The True Value of Free Products," Marketing Science, INFORMS, vol. 26(6), pages 742-757, 11-12.
    3. Alvin E. Roth, 2006. "Repugnance as a Constraint on Markets," Levine's Bibliography 321307000000000629, UCLA Department of Economics.
    4. David Levinson & Andrew Odlyzko, 2007. "Too Expensive to Meter: The influence of transaction costs in transportation and communication," Working Papers 200802, University of Minnesota: Nexus Research Group, revised Feb 2007.
    5. Milton L. Mueller, 2004. "Ruling the Root: Internet Governance and the Taming of Cyberspace," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262632985, December.
    6. Starkie, David, 1998. "Allocating airport slots: a role for the market?," Journal of Air Transport Management, Elsevier, vol. 4(2), pages 111-116.
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    Cited by:
    1. Bellemare, Marc F. & Holmberg, Andrew M., 2010. "The Determinants of Music Piracy in a Sample of College Students," MPRA Paper 23641, University Library of Munich, Germany.

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