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How small is zero price? : the true value of free products

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  • Kristina Shampan'er
  • Dan Ariely
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    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 benefit-cost 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.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 06-16.

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    Date of creation: 2006
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    Handle: RePEc:fip:fedbwp:06-16

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    Keywords: Pricing;

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    References

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    1. Huber, Joel & Payne, John W & Puto, Christopher, 1982. " Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis," Journal of Consumer Research, University of Chicago Press, vol. 9(1), pages 90-98, June.
    2. Gneezy, U. & Rustichini, A., 1998. "Pay Enough - Or Don't Pay at All," Discussion Paper 1998-57, Tilburg University, Center for Economic Research.
    3. Itamar Simonson & Ziv Carmon & Suzanne O'Curry, 1994. "Experimental Evidence on the Negative Effect of Product Features and Sales Promotions on Brand Choice," Marketing Science, INFORMS, vol. 13(1), pages 23-40.
    4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    5. Gneezy, Uri & Rustichini, Aldo, 2000. "A Fine is a Price," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 1-17, January.
    6. Ariely, Dan & Loewenstein, George & Prelec, Drazen, 2006. "Tom Sawyer and the construction of value," Journal of Economic Behavior & Organization, Elsevier, vol. 60(1), pages 1-10, May.
    7. Hsee, Christopher K, et al, 2003. " Medium Maximization," Journal of Consumer Research, University of Chicago Press, vol. 30(1), pages 1-14, June.
    8. Slovic, Paul & Finucane, Melissa & Peters, Ellen & MacGregor, Donald G., 2002. "Rational actors or rational fools: implications of the affect heuristic for behavioral economics," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 31(4), pages 329-342.
    9. Dan Ariely & George Loewenstein & Drazen Prelec, 2003. ""Coherent Arbitrariness": Stable Demand Curves Without Stable Preferences," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 73-105, February.
    10. Uri Simonsohn & George Loewenstein, 2006. "Mistake #37: The Effect of Previously Encountered Prices on Current Housing Demand," Economic Journal, Royal Economic Society, vol. 116(508), pages 175-199, 01.
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    Cited by:
    1. Jessica Cohen & Pascaline Dupas, 2008. "Free Distribution or Cost-Sharing? Evidence from a Malaria Prevention Experiment," NBER Working Papers 14406, National Bureau of Economic Research, Inc.
    2. Christoph, Inken B. & Peter, Guenter & Rothe, Andrea & Salamon, Petra & Weber, Sascha A. & Weible, Daniela, 2010. "School Milk Demand – Interaction Between Policy And Other Factors: Some Preliminary Findings Of A Regional Project," 115th Joint EAAE/AAEA Seminar, September 15-17, 2010, Freising-Weihenstephan, Germany 116415, European Association of Agricultural Economists & Agricultural and Applied Economics Association.
    3. Weible, Daniela & Salamon, Petra & Christoph-Schulz, Inken B. & Peter, Guenter, 2013. "How do political, individual and contextual factors affect school milk demand? Empirical evidence from primary schools in Germany," Food Policy, Elsevier, vol. 43(C), pages 148-158.

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