Many of the largest and most successful businesses today rely on providing services at no charge to at least a portion of their users. Consider companies as diverse as Dropbox, Facebook, Google, LinkedIn, The Guardian, Wikipedia, and the Yellow Pages. For consumers, it is easy to celebrate free service. At least in the short term, free services are often high quality, and users find a zero price virtually irresistible. But long-term assessments could differ, particularly if the free service reduces quality and consumer choice. In this short paper, we examine these concerns. Some highlights:
First, ‘free’ service tends to be free only in terms of currency. Consumers typically pay in other ways, such as seeing advertising and providing data, though these payments tend to be more difficult to measure.
Second, free service sometimes exacerbates market concentration. Most notably, free service impedes a natural strategy for entrants: offer a similar product or service at a lower price. Entrants usually can’t pay users to accept their service. (That would tend to attract undesirable users who might even discard the product without trying it.) As a result, is prices are stuck at zero, entry may be more difficult, effectively shielding incumbents from entry.
In our paper An Introduction to the Competition Law and Economics of ‘Free’ (Antitrust Chronicle, Competition Policy International, Autumn 2018), we examine the competition economics of ‘free’ — how competition works in affected markets, what role competition policy might have and what approach it should take, and finally how competitors and prospective competitors can compete with ‘free’. Our bottom line: While free service has undeniable appeal for consumers, it can also impede competition, and especially entry. Competition authorities should be correspondingly attuned to allegations arising out of ‘free’ service and should, at least, enforce existing doctrines strictly in affected markets.
Benjamin G. Edelman is associate professor at Harvard Business School.
Damien Geradin is full professor at Tilburg Law School and Tilburg Law and Economics Center.