the value of free
TRANSCRIPT
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The Value of Free AN INVESTIGATION INTO THE RATIONALITY OF INDIVIDUALSBY: JOEY WACHTVEITL, JOSH TIBBITTS, AND CHRIS FITZGERALD
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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
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Study Design
12 replications 2 Factors: Chocolate and Price Chocolate: White Chocolate, Milk Chocolate,
Dark Chocolate Prices: ($0.25, $0.01) and ($0.24, $0.00)
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What is the Value of Free?
If there is no interaction between type and price then there is no extra value for free goods.
Conversely, if there is an interaction between factors, then there is an extra value for free goods.
Ho: There is no interaction between the price and type of chocolates.
Ha: There is an interaction between the price and type of chocolates.
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Data Collection Each of us were randomly assigned a number between 1 –
3 and each combination 1 – 12. We used a random generator to then assign four of the
combinations to each of us. Sold our chocolates at different locations across campus, 1
hour for each combination. Participants could only purchase one chocolate We had three different flavors (white, milk, dark) Two types, truffle and kiss Our response was the number chocolates purchased In total we had 144 people participate.
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Factor Structure
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Design
We decided to use a Randomized block design [2] Two way factorial for this experiment.
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Descriptive Statistics
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Descriptive Statistics Continued
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Inferential Statistics
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Inferential Statistics Continued
leveneTest(choco$Sold, choco$Type, center = mean)Levene's Test for Homogeneity of Variance (center = mean) Df F value Pr(>F)group 1 0.1471 0.705 22
leveneTest(choco$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
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Inferential Statistics Continued
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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
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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.
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Outcome
Sufficient evidence suggests a difference in purchase ratios, with respect to price.
Individuals place extra value on free items.
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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?
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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.