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

  • Kristina Shampan'er
  • Dan Ariely
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    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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    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
    Date of revision:
    Handle: RePEc:fip:fedbwp:06-16
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    1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    2. 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.
    3. Hsee, Christopher K, et al, 2003. " Medium Maximization," Journal of Consumer Research, University of Chicago Press, vol. 30(1), pages 1-14, June.
    4. 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.
    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. 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.
    7. Dan Ariely & George Loewenstein & Drazen Prelec, 2005. "Tom Sawyer and the construction of value," Working Papers 05-10, Federal Reserve Bank of Boston.
    8. 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.
    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. 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.
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