The true value of free products

Abstract (Via Shampaner & Ariely)

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 and 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.

Interesting Excerpts (via Shampaner & Ariely)

Cognitive dissonance theory (Festinger and Carlsmith 1959) shows that getting a zero reward can increase liking for the task compared with receiving a small positive reward. Subsequent work reveals that changing a reward from something to nothing can influence motivation (Festinger and Carlsmith 1959) and switch it from intrinsic to extrinsic (Lepper, Greene, and Nisbett 1973), alter self-perception (Bem 1965), and affect feelings of competence and control (Deci and Ryan 1985). For example, Gneezy and Rustichini (2000a) demonstrate that introducing a penalty for parents who are late picking up their children from kindergarten can actually increase tardiness. Similarly, Gneezy and Rustichini (2000b) find that though performance in tasks such as IQ tests or collecting money for charity increases, as expected, with the size of a positive piece-wise reward, the zero reward represents an exception in which performance is greater when no reward is mentioned relative to when a small reward exists.

In general, this research joins a larger collection of evidence that shows zero is a unique number, reward, price, and probability. Although our results suggest that the zero price effect might be accounted for better by affective evaluations than by social norms or mapping difficulty, zero and the price of zero remain a complex and rich domain, and all of these forces may come into play in different situations. In addition, other effects of zero might include inferences about quality, changes in signaling to the self and others, an effect on barriers for trial, and its ability to create habits. Therefore, much additional work is needed to understand the complexities of zero prices in the marketplace.

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08. January 2010 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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