Zero price effect

Zero price effect2018-07-05T15:49:05+00:00

The zero price effect suggests that traditional cost-benefits models cannot account for the psychological effect of a free good. A linear model assumes that changes in cost are the same at all price levels and benefits stay the same. As a result, a decrease in price will make a good equally more or less attractive at all price points. The zero price model, on the other hand, suggests that there will be an increase in a good’s intrinsic value when the price is reduced to zero. The change in demand as a result of price changes is not linear, and there will be some switching from high-value to low-value goods. In addition, free goods have extra pulling power, as a reduction in price from $0.14 to zero is more powerful than a reduction from $0.15 to $0.01. A core psychological explanation for the zero price effect has been the affect heuristic, whereby options that have no downside (no cost) trigger a more positive affective response (Shampanier, Mazar, & Ariely, 2007).

Shampanier, K., Mazar, N., & Ariely D. (2007). Zero as a special price: The true value of free products. Marketing Science, 26, 742-757.

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