IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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

  • Kristina Shampan'er
  • Dan Ariely
Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.bostonfed.org/economic/wp/wp2006/wp0616.htm
    Download Restriction: no

    File URL: http://www.bostonfed.org/economic/wp/wp2006/wp0616.pdf
    Download Restriction: no

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

    as
    in new window

    Length:
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:fip:fedbwp:06-16
    Contact details of provider: Postal: 600 Atlantic Avenue, Boston, Massachusetts 02210
    Phone: 617-973-3397
    Fax: 617-973-4221
    Web page: http://www.bos.frb.org/
    Email:


    More information through EDIRC

    Order Information: Email:


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. 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.
    2. 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.
    3. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    4. 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.
    5. Aldo Rustichini & Uri Gneezy, 2000. "A fine is a price," Natural Field Experiments 00258, The Field Experiments Website.
    6. Hsee, Christopher K, et al, 2003. " Medium Maximization," Journal of Consumer Research, University of Chicago Press, vol. 30(1), pages 1-14, June.
    7. 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.
    8. Uri Gneezy & Aldo Rustichini, 2000. "Pay Enough Or Don'T Pay At All," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 791-810, August.
    9. 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.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:fip:fedbwp:06-16. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.