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

Atsuo Murata
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Atsuo Murata: Department of Intelligent Mechanical Systems, Graduate School of Natural Science and Technology, Okayama University, Okayama, Japan

International Journal of Applied Behavioral Economics (IJABE), 2017, vol. 6, issue 1, 34-46

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.

Date: 2017
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