Zero-price effect and consumer welfare: Evidence from online classified real estate service

We test whether the tendency to overvalue a free service over a paid alternative may lead to inferior economic outcomes. We examine data from an online classified real estate service in Israel that allows private and commercial owners to offer their real estate properties for sale and lease under either free-basic or paid-premium listing categories. Estimation results indicate a zero-price effect in owners’ choice of a listing category. Moreover, although the vast majority of owners opt for the free-ad category, the paid-premium category generates increased buyer demand, greater transaction price, and decreased time-on-market—adding up to an average net benefit of about 3.5%–3.8% of the average transaction price (equivalent to about $12K–$13K). Outcomes are robust to a series of identification and test-design issues.