Competing for Free

A feature of many digital platforms is that they offer services to one side of the platform “for free.” In some instances, the business model requires the consumer to trade their data and attention in return for “free” services. We consider how providing consumers with a service that is ‘free’ can provide consumer benefits but also make it harder for potential rivals to contest that market, since it can be very difficult to undercut an incumbent selling goods for “free.” Price reductions below zero are sometimes possible, as shown by cashback and bundled offers, but can be more challenging when the payment is in data or attention. In addition, any move away from free, up or down, may require a significant additional transaction cost, which can be a significant barrier to consumer switching in certain situations.

By Dr. Helen Jenkins, Dave Jevons & Dr. Andrew Mell¹

I. INTRODUCTION

Consumers have been offered a variety of services “for free” for a long time, however the rise of digital technologies which exhibit high fixed costs and low variable costs has increased the prevalence of “free” services, including free internet search; free email; free social networking; free microblogging; and free entertainment. Of course, in economic terms, a free lunch is very rare, and consumers are typically paying for these services through a form of barter with their attention and their data.² This is not a new phenomenon: historically consumers have recei