Competing Against Free

by David J. Bryce, Jeffrey H. Dyer, and Nile W. Hatch

A NEW COMPETITOR ENTERS YOUR market and offers a product very similar to yours but with one key difference: It’s free. Do you ignore it, hoping that your customers won’t defect or the free product won’t last? Or do you rapidly introduce a free product of your own in an attempt to quash the threat? These are questions faced by an increasing number of companies—and not just in the digital realm. The “free” business models popularized by companies such as Google, Adobe, and Mozilla are spreading to markets in the physical world, from pharmaceuticals to airlines to automobiles.

How should established companies respond? Clearly, managers are having difficulty figuring this ...

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