The Specialness of Zero

A model is provided whereby a monopolist firm chooses to price its product at 0. This outcome is shown to be driven by the assumption of free disposal alongside selection markets (where prices impact a firm’s costs). Free disposal creates a mass point of consumers whose utility from the product is 0...

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Bibliographic Details
Published in:The Journal of law & economics 2022-02, Vol.65 (1), p.157-176
Main Author: Gans, Joshua S.
Format: Article
Language:English
Subjects:
Consumers
Equilibrium
Monopolies
Policy analysis
Prices
Welfare
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Summary:A model is provided whereby a monopolist firm chooses to price its product at 0. This outcome is shown to be driven by the assumption of free disposal alongside selection markets (where prices impact a firm’s costs). Free disposal creates a mass point of consumers whose utility from the product is 0. 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 0 can be a special zone with respect to policy analysis such as in antitrust.
ISSN:0022-2186
1537-5285
DOI:10.1086/714971