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Zero Price Effect

Definition 1

Relationship between the utility of products and services with zero price (free) and those with a non-zero price. Demand will usually be greatest for a zero (free) price option within a set of options with equal price reductions.

Source: Behavioral Science Lab, 2017

Definition 2

The zero price effect suggests that traditional cost-benefits models cannot account for the psychological effect of getting something for free. 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 (Shampanier et al., 2007). Free goods have extra pulling power, as a reduction in price from $1 to zero is more powerful than a reduction from $2 to $1. This is particularly true for hedonic products—things that give us pleasure or enjoyment (e.g. Hossain & Saini, 2015). 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.

Source: Behavioral Economics

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