Optimal pricing strategy for content products under competition: Pay-as-you-want or fixed-price?

Abstract

PAYW (pay as you want) has become a popular pricing strategy for content products in practice and has received considerable attention in the literature. However, the previous literature mainly justifies this pricing strategy in the monopoly setting. By exploiting a duopoly setting, this paper analytically investigates the impact of competition on the value of PAYW by comparing it to the traditional fixed pricing (FP) strategy. We find that only symmetric equilibria exist, i.e., both sellers choose PAYW when the fairness ideal is sufficiently high in equilibrium; otherwise, both choose FP. In sharp contrast to the prior literature, we find that multiple equilibria can exist, and a prisoner’s dilemma situation can arise when the fairness ideal is at a medium level. We also find that the fairness ideal has a nonmonotonic impact on social welfare, and the presence of network externality makes PAYW preferable under competition. We also show that our results qualitative hold when consumers have heterogeneous product values.