Essay On The Zero Price Effect

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Write a critical literature review of the literature concerning the Zero Price Effect

Relationship between demand and price has been studied for years by many academics and can be explained by the law of demand. The law of demand states that all else being equal, as the price of a good rises, the quantity demanded falls (xxx). However, there is a special case when the price of a good is 0 as people do not simply subtract costs from benefits. This phenomenon is called the zero price effect which explains the case of people perceiving the benefits associated with free products as higher (xxx zero as a special price)

Most people are of the opinion that a free good is a good with 0 cost to the individual. However, does a free good really cost
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The research was based on 6 experiments and the conclusion was “zero is a unique number, reward, price, and probability” (xxx zero as a special price). One of the 6 experiments that supports the conclusion of the study asked consumers to make a decision to buy Hershey’s, Lindt truffle, or nothing. When the prices of Hershey’s and Lindt were decreased from 1c and 15c to 0c and 14c respecively, the demand for Hershey’s increases significantly while the demand for Lindt decreases significantly. Moreover, there was only a slight change in demand for Hershey’s and a significant change in Lindt when the prices dropped from 0c&14c to 0c&10c. All this shows that the reduction of a price to zero is more powerful than a five-times-larger price reduction that remains within the range of positive prices. Another point that this experiment clarified is the hypothesis that consumers’ decision to buy a good is affected by the ratio of benefits to costs instead of the difference between them. It is argued that this causes the net value of a good with 0 price to be very high or even infinite as the cost of the good is 0. However, this experiment shows that the hypothesis is not entirely right. If the hypothesis was correct, there …show more content…
This means that people are likely to put in more effort when price is not mentioned than when monetary value is mentioned. However, according to Heyman and Ariely’s (2004) and Shampanier, Mazar and Ariely’s (2005) experiments, social norms do not apply in situations where both social exchanges (when price is 0) and monetary exchanges (when price is non-zero) are present. As a result, the findings on most research journal articles were not affected by social norms and remain

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