ESSA

ESSA

The cost of Free


Suvi Lokuge

By

February 22nd, 2017


The life of a university student is peppered with free stuff. But are free things always worth getting? Suvi Lokuge delves into the hidden costs of Free.


With O-week in full swing be prepared to be constantly bombarded with goody bags, merchandise and free stuff in general. Many businesses are already leveraging the power of free as a marketing and sales tool. It is now common practice for new food outlets to offer free food to draw a crowd and create a buzz. Likewise, online shopping websites provide free shipping if consumers spend over a certain amount to sell more products. As university students, the concept of receiving something for nothing may sound like a great idea to begin with, but what are the perils that are associated with ‘freebies’?

 

Bad decisions

On many occasions, deals with free stuff allow consumers to get more for their money’s worth. However, the problem occurs when free stuff leads consumers to make bad decisions. In economic terms, a bad decision occurs when the individual chooses an option where the costs exceed the benefits. This can easily occur as it is harder to perform cost-benefit analysis when distracted by the free goods. [1] Examples of ‘bad decisions’ include taking free stuff that you know you will never use, or when you give up a better deal and settle for something that you didn’t want, just because it was free.

 

Free lures people in

Most products have advantages and disadvantages. However when a product is free, we perceive that there are less disadvantages, as there is supposedly nothing to lose when consumers buy ‘something for nothing’. Shampan’er and Ariely (2006) indicate that when the price is free, people not only feel as if the cost has decreased, but the advantages have also increased, which is an overreaction – the value of the good has not changed. [2] For example, unhealthy food is disadvantageous but these qualities are overlooked when food is free.

 

Free is different

According to Ariely (2010, p.55); “Zero is an emotional hot button – a source of irrational excitement”. [3] When the price drops from two cents to one cent, there is a small impact on demand.  But when the price drops from one cent to free, the change in demand is huge. [4] Many companies take advantage of consumer’s habits of purchasing more when goods are free. For example, when Amazon first begun offering free shipping for orders over a certain price, there was a dramatic increase in sales [5], demonstrating how free can be used to manipulate consumers into purchasing more goods.

 

Everything comes with a price

What is often overlooked when making decisions relating to free stuff is its opportunity cost. [6] Take the example of free food. If we wait twenty minutes in a queue for free food, there is always something else that we could be doing with the time and effort spent. The saying that ‘there is no such thing as a free lunch’ communicates the concept of opportunity costs; the idea that the time spent on one activity is time taken away from another. [7] Additionally, when a good is free, there are always the negative effects of increased demand: longer lines and an overcrowded space. Basically, it is impossible to get something for nothing; while the price decreases, the other costs increase.

 

The power of Free

Free is an incredibly useful technique to encourage or even manipulate consumers to spend more time or money than they originally intended. For consumers, there are many hidden costs involved with a free transaction; the possibility of making bad decisions, the opportunities forgone, irrational excitement and an increased perceived value of the product.

Despite freebies being a powerful commercial marketing tactic, Ariely (2008) argues that the same principles can be utilised to further social policy objectives. [8] For example, if policy makers were trying to increase the number of electric cars used, registration costs could be made free. Similarly, to encourage the public to invest in preventative health care, the cost of healthcare could be eliminated. [9] This just goes to show that the ‘power of free’ is neither inherently good or bad: like much else, it depends on which purpose it serves.

 

We hope you enjoyed this ESSA Article and our 2017 O-Week festivities! Are you a Monash university student with an interest in economics? Learn how you can join our publications team here: http://bit.ly/2mhxQjK

 

Image Source: https://www.flickr.com/photos/toddle_email_newsletters/7002322316

[1] Ariely, D. (2010). Predictably irrational: the hidden forces that shape our decisions. New York: Harper Perennial.

[2] Shampan’er, K., & Ariely, D. (2006). How small is zero price? : The true value of free products. St. Louis: Federal Reserve Bank of St Louis. Retrieved from https://search-proquest-com.ezproxy.lib.monash.edu.au/docview/1698038018?accountid=12528

[3] Ariely, D. (2010). Predictably irrational: the hidden forces that shape our decisions. New York: Harper Perennial.

[4] Shampan’er, K., & Ariely, D. (2006). How small is zero price? : The true value of free products. St. Louis: Federal Reserve Bank of St Louis. Retrieved from https://search-proquest-

[5] See n 3.

[6] Ariely, D. (2010). Predictably irrational: the hidden forces that shape our decisions. New York: Harper Perennial.

[7] Mises Institute. (2016). The economics of “free stuff”. Retrieved from: https://mises.org/library/economics-free-stuff

[8] Ariely, D. (2010). Predictably irrational: the hidden forces that shape our decisions. New York: Harper Perennial.

[9] Ariely, D. (2010). Predictably irrational: the hidden forces that shape our decisions. New York: Harper Perennial.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

Founding sponsors

 

 

Partner

Gold sponsors

 

 

Silver sponsors

 

 

 

 


Affiliates