The "free economy", where businesses give away their products to make money, is spreading fast thanks to the recession and the increasing reach of digital technology, according to the author Chris Anderson.

Mr Anderson, whose acclaimed book The Long Tail is about how the digital revolution allows businesses to profit from selling small quantities of relatively unpopular items, said that consumers with less in their pockets were looking for bargains, making the free business strategy even more attractive.

The digital revolution of the last ten years meant that an internet economy had grown up where the default price was zero for digital goods, from videos on Hulu to software services from Google to online banking, he said.

Increased processing power, the dropping price of bandwidth and online storage mean that such products could be produced and distributed to many millions of customers at almost no marginal cost in an ultra-competitive environment. This forced lower pricing, all the way to nothing.

Mr Anderson, the editor in chief of Wired, whose next book Free is published later this year, said: "In a competitive market, prices will fall to the marginal cost. We have the first truly competitive market in history - the internet - and companies will compete their way down to zero. This is the force of digital economics."

He described how the "21st Century version" of the free economy had replaced the 20th Century version and how the last few years had seen the rise of the "freemium" business model online , where the vast majority of customers who pay nothing are subsidised by a minority who buy a premium version.

"20th century free was based on a marketing trick. Nothing was really free, you were always going to pay for it later. You are not going to pay for the cell phone, you pay for the minutes, buy-one-get-one free is really half price etc. In the last ten years you can see there is a new kind of free," he said at the South by Southwest interactive conference in Austin, Texas.

The biggest move was the extension of the old third-party advertising business model, where advertisers supported media companies so that customers could get subsidised or free radio, television or newspapers. Internet giants such as Google or Yahoo! or MySpace had taken this far beyond media to provide music, video and software at sometimes vast profits, he said.

"Google is not a media company - most of its business is software and services - but it has used the media business model of advertising to ensure that it never shows up on your credit card," he said.

Now online gaming companies, software businesses and some content providers such as newspapers are using the freemium model to attract customers. This is an inversion of the old free sample model - instead of giving away a few physical samples to attract customers, a company gives away its basic service to everyone for free and then charges a fee for an upgraded or premium version.

"The psychology of free is incredibly powerful. Traditional marketing says this is awesome, you are going to love it but you can't try it until you pay. Free says this is what it is, I think you are going to like it, but try it out. When it comes time to pay, you are already price insensitive, you are a committed customer, you are engaged."

Mr Anderson said the freemium model worked with about 5 per cent of paying customers generally supporting the rest - more than five per cent meant profits. He said that the recession and the drop in advertising revenues meant that online companies were looking to the freemium model more to provide revenue.

Companies could use the freemium model in a variety of ways, he said.

Microsoft now offers free enterprise software to new companies with less than $1 million in revenue through its BizSpark programme so that when they grow bigger they will remain paying customers.

"Free will be out there in every market as an option. You will either compete with free or use free," he said. The availability of open source software and the rise of cloud computing had made the barriers to entry for online companies very low, he said, and businesses could be set up over a weekend with a credit card. "Free is the best way to maximise your reach," he added.

Mr Anderson hinted that he will give away his new book for free in some digital form, possibly as a downloadable PDF. To do otherwise would make him a hypocrite, he acknowledged.

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