When I was an undergraduate, Larry Summers, former Secretary of the Treasury, was the president of our college. He would visit the undergraduate houses and give students a chance to ask him questions. There was free pizza.
I recall my Junior year, a student asked him indignantly about how a university that accepted public funding could develop valuable medical technology and then sell it to a corporation in good conscience. Larry responded, that “I know it can be counterintuitive, but if your goal is to get medical care to the most people possible the right price isn’t always free.”
He went on to explain that if the University put the work into the public domain it would still require a lot of capital to bring it to market. But if every company knew the other companies were building the same device then they were unlikely to see a return on that capital. By licensing the technology to one company they could ensure that company built up capacity to mass produce it and even require as part of the agreement that they distribute it to lower income areas which might not otherwise be profitable.
“The best thing we can do to save lives is make these technologies cheap, but we cannot make them cheap if we make them free.”
I recognize that this is as much an critique of capitalism as it is an explanation but even outside of economics it always stuck with me as a poignant lesson about understanding incentives.
Free is a very unusual price point that introduces nonlinearity in human behavior. Sometimes that nonlinearity is to their benefit as in the case of services like Facebook and Google. However sometimes the opposite is true, for example as it relates to SPAM or abuse where creating some cost forces people to assess their true value for engaging in an activity.
I’m reminded of a clever trick scammers learned a long time ago which was to add more typos to their messages. Of course adding more typos dramatically reduced the number of people who responded which seems like it would be a bad thing. However the people who did respond were substantially less skeptical and more likely to actually fall for the scam. Creating a selection bias that worked in their favor increased the return on time spent for scammers, thus reducing the only marginal cost they had. Had people been charged even a fraction of a fraction of a cent for each email sent, most such campaigns would not be profitable.
There are many more examples. Adoption of Facebook Workplace went up after we started charging for it as it gave companies more confidence that we were accountable to them. People who received a GearVR for free engaged with it much less than those who paid even a small amount for it. There even exists an entire class of luxury goods whose demand increases along with price; people want them because they are expensive.
The unlimited free distribution provided by the internet is generally a good thing. But the right price isn’t always free.