Author: Edelman, Benjamin

Source: The Journal of Economic Perspectives, Volume 23, Number 3, Summer 2009 , pp. 21-36(16)

Publisher: American Economic Association

Abstract:

Some online resources are free and others are not—but it can be hard to predict which resources are in which category. In some cases, users are charged for things such as web-based e-mail, wireless Internet access, and software, while in other cases, they aren't. Zero prices offer important benefits, even relative to small positive prices. For one, fee-free access reduces transaction costs—eliminating the need for billing systems as well as, in many cases, account setup, usernames, and the like. Furthermore, zero prices seem to create an environment of experimentation and progress for products and consumers. Finally, consumers overwhelmingly favor zero-price products, even beyond what might be predicted by their ordinary efforts to maximize consumer surplus. Yet experience in other contexts offers cause for concern. Although marginal costs may be near zero for many levels of use of online resources, costs generally eventually increase as usage nears a capacity constraint given by technological capability or system design. More generally, experience in other contexts repeatedly reveals overconsumption, scarcity, and even hoarding when resources are provided without charge. With competing forces both supporting and opposing zero prices, typical Internet-related activities—like surfing the web, web searches, and e-mail, along with behind-the-scenes practices like domain names and the allocation of IP (Internet protocol) addresses—present a natural context to reevaluate our sense of the tradeoffs that arise between free and a positive price.

Document Type: Research article

DOI: http://dx.doi.org/10.1257/089533009789176717

Publication date: 2009-06-01

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• The Journal of Economic Perspectives (JEP) attempts to fill a gap between the general interest press and most other academic economics journals. The journal aims to publish articles that will serve several goals: to synthesize and integrate lessons learned from active lines of economic research; to provide economic analysis of public policy issues; to encourage cross-fertilization of ideas among the fields of thinking; to offer readers an accessible source for state-of-the-art economic thinking; to suggest directions for future research; to provide insights and readings for classroom use; and to address issues relating to the economics profession.
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