Free riding

 

Institution Definition

Free riding occurs when one firm (or individual) benefits from the actions and efforts of another without paying for or sharing the costs. For example, a retail store may initially choose to incur costs of training its staff to demonstrate to potential customers how a particular kitchen appliance works, in order to expand its sales. However, the customers may later choose to buy the product from another retailer who is able to sell it at a lower price because his business strategy is to do without such training and demonstration, thus avoiding the costs involved. This second retailer is thus viewed as "free-riding" on the efforts and costs incurred by the first retailer, who will lose the incentive to continue demonstrating the product.

© European Commission

Free riding occurs when one firm (or individual) benefits from the actions and efforts of another without paying or sharing the costs. For example, a retail store may initially choose to incur costs of training its staff to demonstrate to potential customers how a particular kitchen appliance works. It may do so in order to expand its sales. However, the customers may later choose to buy the product from another retailer selling at a lower price because its business strategy is not to incur these training and demonstration costs. This second retailer is viewed as "free riding" on the efforts and the costs incurred by the first retailer. If such a situation persists, the first retailer will not have the incentive to continue demonstrating the product.

© OECD

A B C D E F G H I J L M N O P R S T U V