The Specialness of Zero

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.