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The Hidden Costs of Free Goods: Implications for Antitrust Enforcement

 |  November 30, 2014

Posted by Social Science Research Network

The Hidden Costs of Free Goods: Implications for Antitrust Enforcement – Michal S. Gal (University of Haifa – Faculty of Law) and Daniel L. Rubinfeld (University of California at Berkeley – School of Law ; National Bureau of Economic Research (NBER) ; NYU Law School)

ABSTRACT: Today a growing number of goods and services are provided in the marketplace free of charge; indeed, free or the appearance of free, have become part of our ecosystem. More often than not, free goods and services provide real benefits to consumers and are clearly pro-competitive. Yet free goods may also create significant costs. We show that despite the fact that the consumer does not pay a direct price, there are indirect prices that reflect the opportunity cost associated with the consumption of free goods. These indirect costs can be overt or covert, in the same market in which the product is distributed or in related markets, monetary or non-monetary, and short-term or long-term. Most of the economic literature on free goods has focused on two-sided markets in which the free good is provided in exchange for attention or information. We analyze the welfare effects of additional cases that are becoming commonplace in our economy. Our analysis indicates that even goods that are offered for philanthropic motivations might sometimes harm competition and welfare. The article also stresses the need to evaluate the pricing strategies of firms that offer free goods in light of new research pointing to the “irrational” behavioral response of consumers when faced by a free option.

This welfare analysis serves as a basis for the exploration of the antitrust implications of the provision of free goods, which has been relatively neglected. Indeed, as this paper shows, free goods raise significant issues for antitrust enforcement, which run the gamut from market definition to market power and to the evaluation of the competitive effects of mergers and more generally to strategic business behavior. We use examples from diverse jurisdictions and markets to exemplify our arguments and, in particular, focus on three case studies: free search services, free internet browsers and free newspapers.