Capturing zero-price effects in stated choice surveys and implications for willingness-to-pay computation

The zero-price (ZP) effect is a well-established notion in behavioural economics which explains the phenomenon that individuals tend to over-react to free alternatives. Despite the widespread inclusion of zero cost alternatives in choice surveys, especially in the environmental economics and health literature where the ‘free’ status quo alternatives are often compared against the (policy) interventions, choice modellers have paid little attention to the ZP effect to date. We developed an experimental design that allows separate identification of the ZP effect and the SQ effect. Stated choices made by students between different mobile board packages are analysed. Our analysis shows that ZP effect is significant in our data and the observed preference to remain at the SQ is largely due to the ZP effect. We also present experimental design features that allow separation of the ZP effect form the non-linear cost sensitivity. We stress that the prevalence of the ZP effect in observed choice behaviour may introduce bias to the prediction of welfare when the perfect confounding between the ZP and SQ effects is broken.