Larry Lessig is guest blogging at Gelnreynolds.com and discussing the economics of giving away his book for free.
The argument is simple. We'll see if it is right. The basic assumption is this: (a) ebooks are a poor substitute (just now) for printed books. If that's true, then there are only two numbers you need to think about to decide whether giving a book away for free makes sense: (1) those who would have bought the book but won't because the book is now free, and (2) those who would never have seen the book had it not been available for free, but now because they see it, and given assumption (a), they buy it.
The only question a publisher needs to decide is whether (2) is greater than (1): If there are more who will buy it because they see it because it is free and will now now buy it because it is free, then making it free makes sense for the publisher.
I think this model is correct, and has been proven correct in the music business by recording artists like the Grateful Dead, Phish, Widespread Panic, etc. The so called hippy bands of course were not selling records per se, but rather seats at their concerts. By allowing fans to record and trade their concerts they greatly expanded their audience, resulting in more ticket sales (at higher prices) as well as more of all the products you sell at a concert - t-shirts, programs, food and drink, and not incidentaly CD sales.