Pay-what-you-want pricing under competition: Breaking the Bertrand Trap

Abstract

This paper investigates the viability of Pay-What-You-Want (PWYW) pricing when firms compete without restrictions of a minimum payment requirement. When PWYW pricing is practiced without restricting the presence of consumers paying less than marginal cost, or any minimum payment requirement, then the only two equilibrium structures are: either both firms use posted, marginal cost pricing, or one firm adopts PWYW pricing and the other uses posted pricing. The asymmetric pricing equilibrium leads to a softening of price competition where both firms earn positive profits and the Bertrand Trap is broken.