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The Specialness of Zero

Joshua Gans ()

Journal of Law and Economics, 2022, vol. 65, issue 1, 157 - 176

Abstract: 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.

Date: 2022
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Working Paper: The Specialness of Zero (2019) Downloads
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