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How about a "pay what you think it's worth" option that authors can chose as their price. Someone who publishes free books can still get paid for them if the readers chose to. A combination of radio buttons with pre-defined prices like $1, $2, $5, $10 etc as well as a box for those who want to enter their own price (including $0) could work well. Alternately you could forgo the $0 option yet still have the "pay what you want" option with a minimum price.
This pricing model worked for radiohead and Trent Reznor so why not ebooks? Personally if a book is listed for $2 but I feel that the author is well deserving, I don't mind giving a little more.
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