Zero as a special price: The true value of free products

When faced with a choice of selecting one of several available products (or possibly buying nothing), according to standard theoretical perspectives, people will choose the option with the highest cost-benefit difference. However, we propose that decisions about free (zero price) products differ, in that people do not simply subtract costs from benefits but instead they perceive the benefits associated with free products as higher. We test this proposal by contrasting demand for two products across conditions that maintain the price difference between the goods, but vary the prices such that the cheaper good in the set is priced at either a low positive or zero price. In contrast with a standard cost-benefit perspective, in the zero-price condition, dramatically more participants choose the cheaper option, whereas dramatically fewer participants choose the more expensive option. Thus, people appear to act as if zero pricing of a good not only decreases its cost, but also adds to its benefits. After documenting this basic effect, we propose and test several psychological antecedents of the effect, including social norms, mapping difficulty, and affect. Affect emerges as the most likely account for the effect. © 2007 INFORMS.

Duke Scholars

Author Dan Ariely Fuqua School of Business