The Specialness of Zero
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.
Thanks to Kevin Bryan, Len Goff, Shannon Liu, Barry Nalebuff, Fiona Scott Morton, Hal Varian and Glen Weyl for helpful discussions. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.