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Journal of Economic Perspectives: Vol. 23 No. 3 (Summer 2009)

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Priced and Unpriced Online Markets

Article Citation

Edelman, Benjamin. 2009. "Priced and Unpriced Online Markets." Journal of Economic Perspectives, 23(3): 21-36.

DOI: 10.1257/jep.23.3.21

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.

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Authors

Edelman, Benjamin (Harvard U)

JEL Classifications

L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L86: Information and Internet Services; Computer Software

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