Fischer, Greg Karlan, Dean McConnell, Margaret Raffler, Pia
Center Discussion Paper No. 1041
Pricing policy for any experience good faces a key tradeoff. On one hand, a price reduction increases immediate demand and hence more people learn about the product. On the other hand, lower prices may serve as price anchors and, through a comparison effect, decrease subsequent demand. This tension is particularly important for the distribution of health products in lowincome countries, where free or heavily subsidized distribution is a common but controversial practice. Based on a model combining the learning aspect of experience goods with reference-dependent preferences, we setup a field experiment in Northern Uganda in which three health products differing in their scope for learning were initially offered either for free or for sale at market prices. In line with prior studies, when the product has potential for positive learning, we do not find an effect of free distribution on future demand. However, for products without scope for positive learning, we find evidence of price anchors: future demand is lower after a free distribution than after a distribution at market prices.