Abstract
Pay what you want (PWYW) can be an attractive marketing strategy to price discriminate between fair-minded and selfish customers, to fully penetrate a market without giving away the product for free, and to undercut competitors that use posted prices. We report on laboratory experiments that identify causal factors determining the willingness of buyers to pay voluntarily under PWYW. Furthermore, to see how competition affects the viability of PWYW, we implement markets in which a PWYW seller competes with a traditional seller. Finally, we endogenize the market structure and let sellers choose their pricing strategy. The experimental results show that outcome-based social preferences and strategic considerations to keep the seller in the market can explain why and how much buyers pay voluntarily to a PWYW seller. We find that PWYW can be viable on a monopolistic market, but it is less successful as a competitive strategy because it does not drive traditional posted-price sellers out of the market. Instead, the existence of a posted-price competitor reduces buyers' payments and prevents the PWYW seller from fully penetrating the market. When given the choice, most sellers opt for setting a posted price rather than a PWYW pricing strategy. We discuss the implications of these results for the use of PWYW as a marketing strategy. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1946 . This paper was accepted by Uri Gneezy, behavioral economics.
Highlights
In several industries – including museums, software, and charity sales – some sellers use a marketing strategy that lets buyers pay what they want for the goods or services provided
To see how competition affects the profitability and viability of Pay What You Want (PWYW), we implement markets in which a PWYW seller competes with a traditional seller offering posted prices
We organize the presentation and discussion of our experimental results according to the three main reasons for using PWYW: price discrimination, market penetration, and competition
Summary
In several industries – including museums, software, and charity sales – some sellers use a marketing strategy that lets buyers pay what they want for the goods or services provided. Many customers were willing to pay positive prices voluntarily, and some sellers have been using PWYW profitably for many years now. We endogenize the market structure and let sellers choose which pricing strategy to employ. Endogenizing the market structure allows us to observe both the seller’s choice to engage in PWYW pricing, as well as the buyers’ subsequent purchasing and payment decisions. By considering what happens under different market scenarios, we analyze how the interaction of buyers and sellers affects the profitability and viability of PWYW, and how the market structure is formed endogenously. Our results have important implications for when sellers can use PWYW profitably
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