Bending the Demand Curve

Indeed, the appeal of “free” has been shown to be so extraordinary that ****it bends the demand curve. “The demand you get at a price of zero is many times higher than the demand you get at a very low price,”**** says Kartik Hosanagar, a Wharton professor of operations and information management who studies pricing and technology. “Suddenly demand shoots up in a nonlinear fashion.” Josh Kopelman, a venture investor and entrepreneur who founded, has written about what he dubbed **** “the penny gap.” Even charging one cent for something dramatically lessens the demand [generated at] zero cents.****

It’s no surprise that many companies have worked “free” into their offers in a number of different ways. “Cosmetics are never on sale. They say, ‘Buy this at regular price and get a free gift.’ That protects the normal price,”…

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