Tyler Cowen discusses one of the topics in behavioural economist Dan Ariely’s new book “Predictably Irrational” — an experiment to measure the value of giving something away for free rather than selling it. In the experiment, two types of chocolate were sold, a Lindt Truffle (high quality) and a Hershey’s Kiss (lower quality). Initially the prices were set at 15c for the truffle and 1c for the kiss, and 73% of people bought truffles. Then both prices were reduced by 1c, so 14c for the truffle and the kisses were free. In this case 69% of people chose the kiss.

On his blog, Dan talks about some of the possible explanations that were ruled out in their study, such as transaction costs. In the original paper (PDF), “affect” is cited as the most likely cause. I don’t quite understand the psychology jargon, but I think it means that people experience a psychological boost (extra utility) by getting something for free which they don’t get even if they have to pay a tiny amount such as 1c. Thus giving kisses away for free increased demand by much more than the simple 1c price cut would imply.

This has important implications for business models in the content industry. As I said the other day, you can still make money by giving content away for free if you can charge for complementary, customised or improved goods or services. Once the demand boost of going from a positive price to a zero price is taken into account, these strategies become even more attractive.