Buroker did a tweet I liked: "#promotip Stop whining about whether free ebooks frak up the marketplace and test this and other price points for yourself."
Her tweet was funny, but I've seen people fretting themselves into high blood pressure and an ulcer over the availability of free e-books. They're not worried about whether or not they should offer a freebie, they're worried that everyone else will offer everything for free, and the bottom will fall out of the market.
I think this is a misunderstanding of the supply/demand curve. You look at the demand half, and sure thing, demand goes up as the price goes down. Prices get too expensive? People switch to a substitute good.
But there are several important things to keep in mind before freaking out because other people might offer their books for free (aside from the fact that it's almost never helpful to freak out about things you have absolutely no control over).
Thing #1 The supply/demand curve relies on several assumptions that don't actually exist in the real world. There are many of these (for example, in the magical world of classical economics, everyone knows every price available for every item), but the most important one for our purposes is that it assumes all the goods for sale are identical.
Books are not all identical. At all. Now, I would argue that if I'm asking you to pay $26 for Mystery A, and Mystery B, which is similar, is available for $4, you are fairly likely to choose Mystery B. But you could be a big fan of the author of Mystery A, in which case you might gladly pay $26, or even way more than that if it's a first edition or something.
Why are you being so economically irrational? That brings us to....
Thing #2 The cost of a book to the reader is only partially represented by its cost in dollars.
When I read The Fountainhead, it costs me nothing in dollar terms, because I got it from the library. It cost me hours and hours of my time, however, because that damned thing is 800 pages long. It also cost me a great deal of mental and emotional anguish, because it's a terrible, simple-minded book, littered with identical two-dimensional characters making the same point over and over again, and it was written by a mentally-defective, sexually-dysfunctional bore who thought she was the wisest person in all the land.
There are many more Ayn Rand books in the library, and they are free, but I swear to you, I will go to my grave without having read another.
Reading a bad book is a ghastly experience. A bad book makes you wonder why you even bother with humanity. If people invest their time and energy into a bad book, they are just as pissed if the book is cheap or free as they are if it is expensive.
If the cost of a bad book is $0 + your time + your frustration and rage, and the cost of a good book is $4 + your time + your joy and delight, the good book is actually less expensive. People do this math unconsciously all the time: Many people pick up free books and never read them. I strongly doubt that these people aren't reading at all. They just aren't reading the free books, because they'd rather spend their time and energy buying and reading books they know they're going to like.
(The problem traditional publishing faces is that they're offering a very similar book experience but trying to charge $10-$20 more for it. By and large, that math isn't going to work.)
Thing #3 The supply/demand curve has a whole other half to it, called the supply curve.
The demand curve is pretty easy for most people to understand, because most people have hunted a bargain or two in their lifetimes: If it's cheaper, more people will buy it.
But the supply curve sometimes takes a little thinking. Let's say you have a job offer from Firm A that pays $40,000 a year. Firm B offers you a job--identical in every way to Firm A's job--but it would pay you $80,000 a year.
Which job would you take? The one that pays more! Guess what? You're a supplier (supplying labor in that example). Suppliers want to be paid more. The more money that can be made by supplying something, the more people will supply it.
So you look at that supply curve again, and you look what happens when the sale price of the good reaches zero--the number of suppliers does the same thing.
In short, people are greedy, or at least they want to be able to make a living. Surprise! (And hey, it looks like traditional publishing is on the wrong side of that curve, too!)
But gee, there are a ton of free books out there, right? Sure. But I would argue that the majority of them are by people who are either 1. supplying a loss leader, or 2. not serious writers. The people in the first group are offering one free title in hopes that readers will try it, like it, and (this is key) buy more. These authors aren't training readers to get books for free; they're training reader to seek out their other titles. And I'd say they have a lot of evidence on their side that this works. They are your competition, I suppose, but it's not like you didn't have any before.
The people in the second group don't ever expect to make any money writing--they just feel it's important to get the word out about how the Martians have allied with Al Qaeda and Mossad and are remotely controlling President Obama via the ozone layer and Kindle readers. They tend not to work too hard on their craft.
Thing #4 There is nothing new with having a gazillion free books available to compete against yours. It's called the library, and it's been around a while.