Wired's Chris Anderson has been ruminating on the economics of Free or Nearly Free on his blog.
Here's one insightful post on the various ways Free has been working - from RyanAir's 5 Pounds airfares to Google's free-to-consumer services.
It's beginning to look like all businesses need to think hard about what happens when their product approaches Free - through automation, commodotization, competition & outsourcing, whatever. The real issue seems to be - what exactly is your product anyway?

In the creative services business, production costs have been tumbling downward for some time - since the desktop publishing revolution at least (one could argue this has been going on since Gutenberg put the monks out of business...)
While costs have gotten stuck temporarily at various points (remember service bureaus?) the market has always found a way around the chokepoints, such that individual operators with minimal equipment could do tasks that were formerly difficult and expensive.
Now I'm looking at at the next stage - systems that can empower the whole production process, at least for print, and remove the barriers between creative and execution.
This will have the side-effect of destroying a revenue stream. Well, it happened to type, and it's only a matter of time before it happens to page makeup too.

What part of your business could be produced and distributed Free? What will happen when you can't charge for that any more?

Link