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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.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.


Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Wednesday, March 5, 2003