Pay-as-You-Wish Pricing

Some firms use a curious pricing mechanism called "pay as you wish" pricing PAYW. When PAYW is used, a firm lets consumers decide what a product is worth to them and how much they want to pay to get the product. This practice has been observed in a number of industries. In this paper, we theoretically investigate why and where PAYW can be a profitable pricing strategy relative to the conventional "pay as asked" pricing PAAP strategy. We show that PAYW has a number of advantages over PAAP such that it is well suited for some industries but not for others. These advantages are as follows: 1 PAYW helps a firm to maximally penetrate a market; 2 it allows a firm to price discriminate among heterogenous consumers; 3 it helps to moderate price competition. We derive conditions under which PAYW dominates PAAP and discuss ways to improve the profitability of PAYW.

[1]  Rosemary B. Bryant,et al.  To Pay or Not to Pay , 2007 .

[2]  Tony Haitao Cui,et al.  Fairness and Channel Coordination , 2007, Manag. Sci..

[3]  R. Zwick,et al.  Pay what you want ” as a profitable pricing strategy : Theory and experimental evidence , 2010 .

[4]  Fred M. Feinberg,et al.  Do we care what others Get? A Behaviorist Approach to Targeted Promotions , 2002 .

[5]  Christian Traxler,et al.  Norms, moods, and free lunch: Longitudinal evidence on payments from a Pay-What-You-Want restaurant , 2012 .

[6]  Klaus M. Schmidt,et al.  A Theory of Fairness, Competition, and Cooperation , 1999 .

[7]  Z. John Zhang,et al.  Competitive One-to-One Promotions , 2002, Manag. Sci..

[8]  E. Fehr.  A Theory of Fairness, Competition and Cooperation , 1998 .

[9]  John P. Lightle,et al.  The Pay-What-You-Like Business Model: Warm Glow Revenues and Endogenous Price Discrimination , 2010 .

[10]  Z. John Zhang,et al.  Competitive One-toOne Promotions , 2002 .

[11]  Leif D. Nelson,et al.  Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving , 2010, Science.

[12]  Noah J. Goldstein,et al.  Social influence: compliance and conformity. , 2004, Annual review of psychology.

[13]  Z. John Zhang,et al.  Pay to Switch or Pay to Stay: Preference-Based Price Discrimination in Markets with Switching Costs , 2000 .

[14]  Z. John Zhang,et al.  Competitive Coupon Targeting , 1995 .

[15]  Martin Spann,et al.  Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets , 2014, Manag. Sci..

[16]  D. Fudenberg,et al.  Customer Poaching and Brand Switching , 2000 .

[17]  Leif D. Nelson,et al.  Pay-what-you-want, identity, and self-signaling in markets , 2012, Proceedings of the National Academy of Sciences.

[18]  Yuxin Chen,et al.  The Benefit of Uniform Price for Branded Variants , 2012, Mark. Sci..

[19]  X. Vives,et al.  On the Strategic Choice of Spatial Price Policy , 1998 .

[20]  Ju-Young Kim,et al.  Pay what you Want: A New Participative Pricing Mechanism , 2009 .