I feel like this fails to consider my own valuing of my time.
Free Chocolate? Sure.
13¢ chocolate? I've gotta try to make change? An awkward amount no less. 3 pennies? They are getting hard to come by. I didn't even want a chocolate. I don't have any cash on me. Do you take card?
For instance, when I'm buying something off Facebook marketplace, if the items not a multiple of $20 bills and $50 bills, the denominations I can get from the ATM, I'm far less likely to buy it because I have to stop somewhere else on my way to the seller and try and make change. It's a pain in the butt.
I have literally overpaid for things from marketplace by a dollar or two to avoid making change.
But if my only options are 1¢ chocolate versus 13¢ chocolate, those are on way closer footing because either way I have to dig my wallet out.
I'd still take the Hershey kiss though because it tastes better.
Sorry I'm from Sweden and our banks have a service called Swish where we can send money on the phone. Paying in cash is extremely uncommon now a days. Every time I've bought or sold something on FB Marketplace the last decade I've used Swish. I thought you had something similar called Venmo in the US?
Some people will want cash for in person transactions but it's more rare. In the US you run into a lot of people who don't trust phones, technology, tech companies, the government, or any other number of reasons to demand physical payments.
Since the government and corporations aggressively spy on everyone, and since government programs are often incompetent or overfunded or underfunded or corrupted or evil, there is (justly) little faith in the government.
Cash works fine. It can't be censored easily, it can't be tracked easily. ATMs have it.
Venmo isn't really something I'd consider a "bank service"; it was its own company for a bit, and I think now it's owned by PayPal.
The closest thing here is probably Zelle, but at least with my bank's app, the interface is a bit of a pain. This basically is just another form of what the parent commenter said; how much do I value my own time and convenience compared to what I'd be getting?
I thought the article would be about something like when you get $100 free chip, you are much more likely to gamble and lose it; or when someone win a lottery, they would quickly spent the money compared to if they had earned the money with hard work.
BTW, behavior economics people like DAN ARIELY in this article got bad reputation after being found fabricating data on the research about honesty
https://www.npr.org/transcripts/1190568472
The study they cite seems to be leaving out something: are the participantsforced to make a choice, or could they choose to not take either? If I were presented with the two choices they give, I'd probably take the free one in the first choice but not take either in the second because I just wouldn't care enough to buy the single small piece of chocolate for either price. If I were forced to make a choice, I might pick the Lindt, but I'd argue that then their experiment isn't actually testing the same thing. A forced choice been two things isn't the same as two options that can both be rejected.
For anyone who thinks there is flawed logic in this I encourage you to study JC Penney's pricing strategy failure. People, by and large, are not rational.
I'll never understand the people who stand in line for an hour for "Free donut day" or something similar. You really value a $1.50 donut equal to an hour of your time?
If I had to make a guess, it is for the same reason that people will pay more for free shipping: they simply aren't doing the math. Of course, there could also be other reasons, things like people valuing their free time differently. Just because your employer is willing to pay $N/hour doesn't mean you are losing $N by waiting in line for an hour.
I had some coworkers who would always find these things and go to them during the day. It was a little outing for their team while they stood in line and talked. No harm in doing something like that from time to time, but I did think it was funny that they wouldn't just put it on the calendar and spend a couple bucks on going to a coffee shop instead.
Standing in line for an event is fun, even if it's a silly promotional event. You get to laugh and chitchat with the other people in line, and it's something different to do that doesn't require much effort. But also, those lines usually balance out relative to the value of the item, if it takes too long people start realizing it's not worth it and leave.
I wake up every morning in a bed that’s too small, drive my daughter to a school that’s too expensive, and then I go to work to a job for which I get paid too little. But on Pretzel Day… well, I like Pretzel Day
Don't think that's how most people see it. The worth of "an hour of your time" is basically 0 no matter who you are. If you're doing something specific (like working) then that hour of your time has value which is preset by your employer.
But that doesn't extend into all hours of your life. Your employer will not pay your hourly rate for your personal hours just to live.
You can of course then say "oh but I value my time," but value is subjective while the dollar amount isn't. If you truly believe that, then you also believe that people's personal time has different worth based on how much they're paid, which is a fundamentally wrong way to look at the world imo.
Many people are not salaried and can roughly convert more working hours into proportionally more money, so the comparison does kinda make sense. Why uselessly stand in line for an hour when you could use that hour to make more deliveries, do research on one of your clients cases, or whatever?
Try thinking of it as if the options are watching TikTok for an hour vs watching TikTok for an hour in a line, plus you get a free donut. Standing in the line doesn't cause the person to miss out anything.
Behavioral economics have repeatedly showed that humans are consistently irrational when it comes to buying and selling stuff.
Modeling humans as rational agents simplifies the economic reasoning and the equation a lot so it's not entirely worthless, but we must always keep in mind that this model is very far from the reality even if it's sometimes useful.
I was hoping this would talk about the hordes of ungrateful users demanding more and more free labor from the unpaid volunteers of open source projects, but I guess we still don't know how to deal with that properly.
One interesting angle here is how “free” changes not just user behavior, but also how builders interpret demand.
In AI products especially, it's very easy to mistake “engagement” for “real demand” — because when things are free, people try everything. You get signals, but many of them are noisy or even misleading.
I’ve been thinking about this a lot in the context of marketing tools: instead of optimizing for more exposure or more content, maybe the harder problem is filtering out false positives — figuring out where genuine demand actually exists.
Otherwise, we might just be scaling irrational behavior on both sides: users consuming free stuff, and builders chasing the wrong signals.
I think this is exactly what's been happening ever since the ad-supported business model for the Internet began to spread. None of the big tech companies know what their services are actually worth to their users. The only way to really find out would be to have users pay for them, but that's a nonstarter now.
What something is worth and what it costs are two different things. The big correlation is that if something costs more to produce than it's worth to the customer, nobody is going to make it. But if it costs less to produce than it's worth, who gets the surplus? In a competitive market, it's mostly the consumer rather than the supplier, because customers pick the supplier with the best price.
What ad-supported services did is zero out the price of anything that costs less to provide than the amount of ad revenue it generates. But the amount of ad revenue companies get per-user is already pretty small and companies are demonstrably willing to provide the existing services for that amount of money, so we know the upper bound and it's not that high.
> What something is worth and what it costs are two different things.
Yes, surplus is a thing, I agree. But that doesn't materially change what I said. The thing still has to be worth at least as much as it costs for users to be willing to pay for it, so what users will pay at least sets a lower bound on what the thing is worth to users. (Note that it can be worth different amounts to different users; the more precise way of stating it would be that in a competitive market, price equals marginal cost equals marginal value, i.e., value to the marginal user, the user who just breaks even paying that price for it.)
> What ad-supported services did is zero out the price of anything that costs less to provide than the amount of ad revenue it generates.
Which also uncouples the price from any measure of value to the user. The price is now measuring the marginal value to the ad purchasers. The value to the users can be anything greater than zero--the fact that they're using it at all means (or should mean, if the users are rational) that the value to them is positive. But it could still be less than the cost to produce. And the worse the user experience gets, the more likely it is that the value to users is less than the cost to produce, even if that cost is small.
Plus, there's a whole other piece of this that the analysis we've just done doesn't even capture: externalities. One simple way of stating what many people think is wrong with the ad-supported business model is that it creates large negative externalities that, on net, mean that the value to users is negative--but the users don't see the externalities so they don't realize this, and the tech companies have offloaded the costs of the externalities onto others, so they don't see them either.
> Note that it can be worth different amounts to different users; the more precise way of stating it would be that in a competitive market, price equals marginal cost equals marginal value, i.e., value to the marginal user, the user who just breaks even paying that price for it.
In a competitive market the price only depends on the value to users in the sense that it's required to be lower than that to make any sales. If something costs $1 to produce in a highly competitive market then the price is either going to be ~$1 completely regardless of how much more value people get from it than that, or no one will value it at even $1 and then no one will produce it. This is why farmers are always on the edge of bankruptcy even though their product is "without this you will die". Actual competitive market.
> Which also uncouples the price from any measure of value to the user.
It uncouples the lower bound. If the production cost is $1 but the user only values it at $0.50, now it still gets produced as long as the advertiser is willing to pay $1 to show the user the ads. But depending on how much you value not having ads, that could still be good. You got $0.50 worth of value without paying anything.
> And the worse the user experience gets, the more likely it is that the value to users is less than the cost to produce, even if that cost is small.
The real problem here is, they can do something you value at negative $10, but the advertiser will pay them an extra $0.05 to do it, and then they do it because "you're not the customer, you're the product".
In an idealized market this doesn't happen because then you just pay them the incremental $0.05 instead of the advertiser, but we've been screwed by the regulatory environment on both ends. For the seller it's hard to accept small amounts of money from arbitrary users without doing business with a fickle payment intermediary that wants to take a huge cut for small transactions and can shut down your business on a whim with no recourse, and for the customer it's hard to make a tiny digital payment to a service without linking it to your identity, which is often the exact thing you were trying to pay something to prevent.
But that seems like more of a problem caused by not having a good anonymous digital payments system than one caused by advertising. The advertising is just the infelicitous workaround.
> but the users don't see the externalities so they don't realize this
Externalities are when the costs are imposed on someone who isn't a party to the transaction. What you're describing is an information asymmetry.
In theory those can be solved just by providing the information to the users so they can make a better decision, but that's assuming the market is actually competitive. If e.g. you like Android and have one but don't like Google spying on you, are there viable alternatives to Google Play and the other Google services? Judging by how many people actually use them instead of the Google ones, big no. But then we're back to this really being a different problem again, this time antitrust.
"None of the big tech companies know what their services are actually worth to their users".
The users are the product. They sell their attention to the advertisers. And they know exactly how much that attention is worth, because they use auctions to set the price.
Free Chocolate? Sure.
13¢ chocolate? I've gotta try to make change? An awkward amount no less. 3 pennies? They are getting hard to come by. I didn't even want a chocolate. I don't have any cash on me. Do you take card?
For instance, when I'm buying something off Facebook marketplace, if the items not a multiple of $20 bills and $50 bills, the denominations I can get from the ATM, I'm far less likely to buy it because I have to stop somewhere else on my way to the seller and try and make change. It's a pain in the butt.
I have literally overpaid for things from marketplace by a dollar or two to avoid making change.
But if my only options are 1¢ chocolate versus 13¢ chocolate, those are on way closer footing because either way I have to dig my wallet out.
I'd still take the Hershey kiss though because it tastes better.
Some people will want cash for in person transactions but it's more rare. In the US you run into a lot of people who don't trust phones, technology, tech companies, the government, or any other number of reasons to demand physical payments.
Since the government and corporations aggressively spy on everyone, and since government programs are often incompetent or overfunded or underfunded or corrupted or evil, there is (justly) little faith in the government.
Cash works fine. It can't be censored easily, it can't be tracked easily. ATMs have it.
When I trust the phones, I'll use phone payments.
The closest thing here is probably Zelle, but at least with my bank's app, the interface is a bit of a pain. This basically is just another form of what the parent commenter said; how much do I value my own time and convenience compared to what I'd be getting?
Is this for real? We can request 5s and 10s from the atm, along with 20s and 50s.
BTW, behavior economics people like DAN ARIELY in this article got bad reputation after being found fabricating data on the research about honesty https://www.npr.org/transcripts/1190568472
But that doesn't extend into all hours of your life. Your employer will not pay your hourly rate for your personal hours just to live.
You can of course then say "oh but I value my time," but value is subjective while the dollar amount isn't. If you truly believe that, then you also believe that people's personal time has different worth based on how much they're paid, which is a fundamentally wrong way to look at the world imo.
Fail to consider the transaction cost of paying the 13 cents for the Lindt, compared to the free Hersheys.
Plus Lindt sucks.
People give it me all the time as gifts. I give then give it away to random people like couriers.
Godiva on the other hand...
Modeling humans as rational agents simplifies the economic reasoning and the equation a lot so it's not entirely worthless, but we must always keep in mind that this model is very far from the reality even if it's sometimes useful.
Some for sure, but I wouldn’t count on it for interpreting price elasticity.
I still believe in the premise because of the action on Facebook buy nothing groups.
In AI products especially, it's very easy to mistake “engagement” for “real demand” — because when things are free, people try everything. You get signals, but many of them are noisy or even misleading.
I’ve been thinking about this a lot in the context of marketing tools: instead of optimizing for more exposure or more content, maybe the harder problem is filtering out false positives — figuring out where genuine demand actually exists.
Otherwise, we might just be scaling irrational behavior on both sides: users consuming free stuff, and builders chasing the wrong signals.
What ad-supported services did is zero out the price of anything that costs less to provide than the amount of ad revenue it generates. But the amount of ad revenue companies get per-user is already pretty small and companies are demonstrably willing to provide the existing services for that amount of money, so we know the upper bound and it's not that high.
Yes, surplus is a thing, I agree. But that doesn't materially change what I said. The thing still has to be worth at least as much as it costs for users to be willing to pay for it, so what users will pay at least sets a lower bound on what the thing is worth to users. (Note that it can be worth different amounts to different users; the more precise way of stating it would be that in a competitive market, price equals marginal cost equals marginal value, i.e., value to the marginal user, the user who just breaks even paying that price for it.)
> What ad-supported services did is zero out the price of anything that costs less to provide than the amount of ad revenue it generates.
Which also uncouples the price from any measure of value to the user. The price is now measuring the marginal value to the ad purchasers. The value to the users can be anything greater than zero--the fact that they're using it at all means (or should mean, if the users are rational) that the value to them is positive. But it could still be less than the cost to produce. And the worse the user experience gets, the more likely it is that the value to users is less than the cost to produce, even if that cost is small.
Plus, there's a whole other piece of this that the analysis we've just done doesn't even capture: externalities. One simple way of stating what many people think is wrong with the ad-supported business model is that it creates large negative externalities that, on net, mean that the value to users is negative--but the users don't see the externalities so they don't realize this, and the tech companies have offloaded the costs of the externalities onto others, so they don't see them either.
In a competitive market the price only depends on the value to users in the sense that it's required to be lower than that to make any sales. If something costs $1 to produce in a highly competitive market then the price is either going to be ~$1 completely regardless of how much more value people get from it than that, or no one will value it at even $1 and then no one will produce it. This is why farmers are always on the edge of bankruptcy even though their product is "without this you will die". Actual competitive market.
> Which also uncouples the price from any measure of value to the user.
It uncouples the lower bound. If the production cost is $1 but the user only values it at $0.50, now it still gets produced as long as the advertiser is willing to pay $1 to show the user the ads. But depending on how much you value not having ads, that could still be good. You got $0.50 worth of value without paying anything.
> And the worse the user experience gets, the more likely it is that the value to users is less than the cost to produce, even if that cost is small.
The real problem here is, they can do something you value at negative $10, but the advertiser will pay them an extra $0.05 to do it, and then they do it because "you're not the customer, you're the product".
In an idealized market this doesn't happen because then you just pay them the incremental $0.05 instead of the advertiser, but we've been screwed by the regulatory environment on both ends. For the seller it's hard to accept small amounts of money from arbitrary users without doing business with a fickle payment intermediary that wants to take a huge cut for small transactions and can shut down your business on a whim with no recourse, and for the customer it's hard to make a tiny digital payment to a service without linking it to your identity, which is often the exact thing you were trying to pay something to prevent.
But that seems like more of a problem caused by not having a good anonymous digital payments system than one caused by advertising. The advertising is just the infelicitous workaround.
> but the users don't see the externalities so they don't realize this
Externalities are when the costs are imposed on someone who isn't a party to the transaction. What you're describing is an information asymmetry.
In theory those can be solved just by providing the information to the users so they can make a better decision, but that's assuming the market is actually competitive. If e.g. you like Android and have one but don't like Google spying on you, are there viable alternatives to Google Play and the other Google services? Judging by how many people actually use them instead of the Google ones, big no. But then we're back to this really being a different problem again, this time antitrust.
The users are the product. They sell their attention to the advertisers. And they know exactly how much that attention is worth, because they use auctions to set the price.