Working Paper: NBER ID: w26485
Authors: Joshua S. Gans
Abstract: A model is provided whereby a monopolist firm chooses to price its product at zero. This outcome is shown to be driven by the assumption of ‘free disposal’ alongside selection markets (where prices impact on a firm’s costs). Free disposal creates a mass point of consumers whose utility from the product is zero. When costs are negative, the paper shows that a zero price equilibrium can emerge. The paper shows that this outcome can be socially optimal and that, while a move from monopoly to competition can result in a negative price equilibrium, this can be welfare reducing. The conclusion is that zero can be a ‘special zone’ with respect to policy analysis such as in antitrust.
Keywords: No keywords provided
JEL Codes: L11; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| free disposal (L99) | zero price equilibrium (D41) |
| monopolist sets zero price (D41) | attracts consumers (D16) |
| zero pricing (D41) | socially optimal under certain conditions (D61) |
| competition (L13) | negative prices (D41) |
| monopolist's choice to price at zero (D42) | influenced by transaction costs (D23) |
| monopolist's preferences align with social planner's (D42) | under specific circumstances (Z00) |
| zero pricing conditions (D41) | affect welfare evaluations (D69) |
| competition (L13) | overproduction and selection of high-cost consumers (D19) |