Update: An article in The Economist (11/27/2009) adds some evidence to the hypothesis stated in this article.
There is one behavioral economics experiment that has been in blogs and mainstream media more than any other, it is the Hersheys and Lindt experiment done by Dan Ariely, Professor at Duke and author of Predictably Irrational. The news presence comes thanks to Mr. Chris Anderson who used it in his latest book, Free, to make his case about the attractiveness of the $0.00 price.
We already know that from Prof. Ariely’s book and we also know that Mr Anderson leaves out the part of the book (and research) in which Prof Ariely warns about the anchoring effects of initial low price. Now let us take the discussion one step further. The Hershey’s experiment found that when offered free, more people preferred Hershey’s than they did when offered at 1 cent. (You can read Predictably Irrational for the details).
Suppose if there had been a third stage to this experiment, this time in addition to offering Lindt at a small price and Hershey’s at $0.00, there were also other candies (comparable to Hershey’s kisses) offered at $0.00 as well. Then what do you think will be the share of the different free offerings? For sure, the market will be fragmented. In addition, I hypothesize that(which needs experimentation to verify)
- more people will switch back to Lindt
- of the free versions, the name brand versions will end up garnering a larger share
- most of the free versions will find very few to no takers
The problem is when you give it away for free and there are many free offerings from your competitors, customers will start worrying about their opportunity cost and go back to priced versions. The fact that some offerings are not free signal value to customers and reduces their risk of trying.
Now where does that leave the “long tail” free offerings?