All External Reference Prices Are Not the Same: How Magnitude, Source, and Fairness Shape Payment for Digital Goods

Abstract

Music, movies, e-books, news: all industries that have been impacted by free distribution of their products. For many individuals, this wide availability of free substitutes drives users’ willingness-to-pay down. In this environment, how can platforms motivate consumers to pay for goods that they may be able to get for free? We demonstrate providing flexibility in payment through allowing users to “pay what you want,” along with providing external reference prices (ERPs) set by different sources, that is, other similar consumers or the platform itself, can influence payment. Importantly, a site-set ERP has more influence increasing payment than a socially-set ERP. An interesting nuance to this is that when the ERP is perceived to be high, the marginal effect of an increase in ERP on payment is smaller than when it is perceived to be fair; in other words, providing a fair ERP is more effective in increasing payment than providing an ERP that is too high. Altogether, platforms can leverage these findings in designing interfaces to provide information that can motivate consumers to pay for digital goods.