Discussion on Human's Irrational Behavior to Price of Zero: Identification of Condition of Zero-Price Effect

Discussion on Human's Irrational Behavior to Price of Zero: Identification of Condition of Zero-Price Effect

Atsuo Murata (Department of Intelligent Mechanical Systems, Graduate School of Natural Science and Technology, Okayama University, Okayama, Japan)
Copyright: © 2017 |Pages: 13
DOI: 10.4018/IJABE.2017010103
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Abstract

While it is assumed that the alternative with a larger profit is preferred to that with a smaller profit according to the traditional cost-benefit (linear) model, it is demonstrated that the lower discount accompanied by a price of zero is preferred to the larger discount without a price of zero. This is called the zero-price effect. Using the decision making situation to choose from alternatives (A) and (B) below, the zero-price effect was discussed as a function of parameters higher price (aX (a>1)) and lower price (X) and the relationship between the zero-price and the discounted amount. (a-1)X = Z corresponds to the case where the discounted price in alternative (B) is equal to the price of zero (X) in alternative (A). (a-1)X>Z corresponds to the case where the discounted price in alternative (B) is larger than the price of zero (X) in alternative (A). Decision making to choose from alternatives (A) and (B): (A) A product of $X is obtained for free; (B) A product of $Y( = aX) is discounted and sold with the price of $Z. In this manner, it was explored whether the zero-price effect was universally observable as a function of lower price X, higher price Y(= aX) and the relationship between the zero-price X and the discounted amount Y-Z. When (a-1)X = Z, the zero-price effect was observed only for (a: large, X: large) and (a: large, X: small). When a was large, the zero-price effect was observed irrespective of the value of X. When a was small, the zero-price effect was not observed. The author's decision tended to deviate from rational behavior assumed in traditional economics for large values of a irrespective of X. The price of zero must be irrationally chosen due to the overestimation of price of zero or affect heuristic. When (a-1)X>Z, the zero-price effect was observed only for (a: large, X: small) and (a: small, X: small). When X was small, the zero-price effect was observed irrespective of the value of a. When X was large, the zero-price effect was not observed. The human's decision tended to deviate from rational behavior assumed in traditional economics for small values of X irrespective of the value of a. In this manner, it has been indicated that the zero-price effect is not necessarily observable and holds under limited conditions.
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Introduction

It has been suggested that decisions about free products, the price of which is zero, are different from simply subtracting costs from benefits (Ariely, 2009). The benefits associated with the price of zero attached to free products are irrationally perceived to be higher. Under such a condition of price of zero, a large number of participants tended to prefer a less attractive product (free product) to a more attractive one. In such a situation, we seem to act as if pricing a product as free not only decreases its cost, but also increases its benefits. This corresponds to an irrational behavior to the price of zero, which distorts our judgment to an irrational one. Here, what the term “irrational” means is that the lower discount accompanied by the price of zero is preferred to the larger discount without the price of zero. In other words, when one was required to choose from the two alternatives (A) A product of $1 is obtained for free (price of zero), and (B) A product of $5 is discounted and sold with the price of $2, choosing alternative (A) that has a smaller profit ($1 < $3(= $5-$2)) is regarded to be irrational. According to traditional cost-benefit model, it is reasonable to assume that the alternative (B) with a larger profit is more frequently chosen.

When making decision concerning prices or costs, we tend to apply market norms. On the other hand, when prices are not related to decision making (when the price is zero), it tends that we apply social norms to make decision on choices and efforts (Heyman and Ariely, 2004). Viewed from cognitive dissonance theory (Festinger and Carlsmith, 1959), it is speculated that getting zero reward for performing a task, compared with getting a small positive reward, can increase motivation to the task. Reducing the reward of some activity or behavior to zero can influence motivation, and alter how we feel competence and control of the activity or behavior (Deci and Ryan, 1985). Gneezy and Rustichini (2000a) empirically demonstrated that imposing a penalty on parents who were late in picking up their kids from kindergarten was not effective at all and on the contrary increased tardiness. Gneezy and Rustichini (2000b) also found that the performance in tasks such as IQ tests or collecting money for charity was higher when no reward was provided than when a small reward was given. Costly alternatives in decision making are related to market-exchange norms, while free products give rise to social norms of exchange (Fiske, 1992). Heyman and Ariely (2004) demonstrated that one was likely to exert higher effort under social norm when no monetary rewards were provided than when small or medium monetary rewards were provided. Social norms are more likely to appear when a reward or penalty is not attached to the task or activity. However, it is difficult to find a social factor on which social norm is based in decision making of this study. Therefore, as stated in Shampanier, Mazer, and Ariely (2007), it seems that the social norm is not applicable to account for the zero-price effect in monetary decision making.

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