This study investigated whether consumers place extra value on free goods compared to similarly priced goods. Researchers conducted a study with 12 replications where participants could purchase one of three types of chocolates (white, milk, or dark) at either $0.25 or $0.01, or $0.24 or free. An interaction between chocolate type and price would suggest consumers value free goods more. Analysis found a significant interaction, suggesting consumers do place extra value on free items over similarly priced items. This challenges the economic assumption that consumers always act rationally. However, the study had limitations like unequal variances and could be improved with more observations.
1. The Value of Free
AN INVESTIGATION INTO THE RATIONALITY OF INDIVIDUALS
BY: JOEY WACHTVEITL, JOSH TIBBITTS, AND CHRIS FITZGERALD
2. Consumer Theory: Completeness
Consumers reveal preferences through purchase
habits
Consumers prefer certain goods over others
A > B, A < B, or B = A
Our study challenges completeness in consumer
theory
3. Study Design
12 replications
2 Factors: Chocolate and Price
Chocolate: White Chocolate, Milk Chocolate, Dark
Chocolate
Prices: ($0.25, $0.01) and ($0.24, $0.00)
4. What is the Value of Free?
If there is no interaction between type and price then there is
no extra value for free goods.
Conversely, if there is an interaction between factors, then
there is an extra value for free goods.
Ho: There is no interaction between the price and type of
chocolates.
Ha: There is an interaction between the price and type of
chocolates.
5. Data Collection
Each of us were randomly assigned a number between 1 – 3 and
each combination 1 – 12.
We used a random generator to then assign four of the
combinations to each of us.
Sold our chocolates at different locations across campus, 1 hour for
each combination.
Participants could only purchase one chocolate
We had three different flavors (white, milk, dark)
Two types, truffle and kiss
Our response was the number chocolates purchased
In total we had 144 people participate.
11. Inferential Statistics Continued
leveneTest(choco$Sold, choco$Type, center = mean)
Levene's Test for Homogeneity of Variance (center = mean)
Df F value Pr(>F)
group 1 0.1471 0.705
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leveneTest(choco$Sold, choco$Price, center = mean)
Levene's Test for Homogeneity of Variance (center = mean)
Df F value Pr(>F)
group 1 1.5409 0.2276
22
By these levene tests we fail to reject the null so the variances are not
equal. We tried to do various transformations (log, sin, cos and inverse) none
of them improved the variance issues. We decided to move forward and used
a 0.01 level of significance for our tests
13. Inferential Statistics Continued
Interaction
Ho: There is no interaction between Price and Type Ha: There is an
interaction
Test Statistic F=9.430
Degrees of Freedom Num df=6 Den df=48
P-value =0.00659
Since the P-value is less than 0.05 so we would reject the null hypothesis
Therefore, we have sufficient evidence that there is an interaction between
type and price
14. Inferential Statistics Continued
Based on the results we see that the only significance was with the
interaction, which was what we were interested in so we were happy to see
that.
15. Outcome
Sufficient evidence suggests a difference in purchase ratios, with respect to
price.
Individuals place extra value on free items.
16. Implications on Economic Assumptions
Fundamental assumption in economics are that individuals act rationally.
With price difference of $0.24 for both price points, purchasing ratio’s
should not change.
Is the fundamental assumption incorrect?
17. Experiment Shortcomings
We lack the ability to measure marginal utility for each consumer.
The variances of high prices and low prices are unequal.
A greater number of observations would improve our study.
