Why Zero is a special price?

When faced with a choice of selecting one of several available products (or possibly buying
nothing), according to standard theoretical perspectives, people will choose the option with the
highest cost-benefit difference. Starting with cognitive dissonance theory, it has been shown
that getting zero reward for performing a task, compared with getting a small positive reward,
can increase the desirability of the task. Subsequent work reveals that changing a reward from
something to nothing can influence motivation and switch it from intrinsic to extrinsic alter
self-perception, and affect feelings of competence and control. Although performance in tasks
such as IQ tests or collecting money for charity increases, as expected, with the size of a
positive piecewise reward, the zero reward represents an exception in which performance is
greater when no reward is mentioned relative to when a small reward exists.

Related to these findings on motivation and incomplete contracts, it has also been
shown that when prices are mentioned, people apply market norms, but when prices are not
mentioned (i.e., the price effectively is zero), they apply social norms to determine their choices
and effort. However in the domain of gambling, people perceive zero probability (and
certainty) substantially differently than they do small positive probabilities. That is, the values
of the latter are perceived as higher than they actually are, perceptions of zero probability are
accurate.

Intuition and anecdotal evidence suggest that in some sense, people value free things
too much. When Ben and Jerry’s offer free ice-cream cones, or Starbucks offers free coffee,
many people spend hours in line waiting to get the free item, which they could buy on a
different day for two to three dollars. At first glance, it might not be surprising that the demand
for a good is very high when the price is very low (zero), but the extent of the effect is intuitively
too large to be explained by this simple economic argument.

Shampanier et al. (2007) conducted a series of experiments to demonstrate that the

decisions about free (zero price) products differ, in that people do not simply subtract costs
from benefits but instead they perceive the benefits associated with free products as higher.
People appear to act as if zero pricing of a good not only decreases its cost, but also adds to its
benefits. They also test several psychological antecedents of the effect.
References
Shampanier, K., Mazar, N., & Ariely, D. (2007). Zero as a special price: The true value of free
products. Marketing science, 26(6), 742-757.