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The pay-what-you-want business model: Warm glow revenues and endogenous price discrimination

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  • Isaac, R. Mark
  • P. Lightle, John
  • A. Norton, Douglas

Abstract

We explore the potential benefits of an up-and-coming business model called “pay-what-you-want” in an environment where consumers experience a warm glow by patronizing a particular firm. We show that, given a social norm regarding minimum contributions, a pay-what-you-want firm should announce a minimum suggested contribution, which is positive—but smaller than the profit-maximizing single price—so as to benefit from “endogenous price discrimination,” whereby consumers differentially contribute more than the suggested minimum. Furthermore, a pay-what-you-want scheme can improve market efficiency and, in special cases, generate more profit than a standard posted price scheme. These results are robust to alternate motivations for generosity, including gift-exchange.

Suggested Citation

  • Isaac, R. Mark & P. Lightle, John & A. Norton, Douglas, 2015. "The pay-what-you-want business model: Warm glow revenues and endogenous price discrimination," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 57(C), pages 215-223.
    • Handle: RePEc:eee:soceco:v:57:y:2015:i:c:p:215-223
    DOI: 10.1016/j.socec.2015.02.003
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    2. Bourreau, Marc & Doğan, Pınar & Hong, Sounman, 2015. "Making money by giving it for free: Radiohead’s pre-release strategy for In Rainbows," Information Economics and Policy, Elsevier, vol. 32(C), pages 77-93.
    3. Ajith, Vineeth & A.S., Reshma & Mohan, Renjith & Vinodini Ramesh, Maneesha, 2022. "Empowering communities in addressing drinking water challenges using a systematic, participatory and adaptive approach and sustainable PPP model," Technological Forecasting and Social Change, Elsevier, vol. 185(C).
    4. Rafael Luis Wagner, 2019. "Lowering consumers’ price image without lowering their internal reference price: the role of pay-what-you-want pricing mechanism," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(4), pages 332-341, August.
    5. Britta Butz & Christine Harbring, 2022. "Tipping for charity: a field experiment in charitable giving on free walking tours," Journal of Business Economics, Springer, vol. 92(5), pages 781-808, July.
    6. Samahita Margaret, 2020. "Pay-What-You-Want in Competition," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 20(1), pages 1-16, January.
    7. Chao, Yong & Fernandez, Jose & Nahata, Babu, 2019. "Pay-what-you-want pricing under competition: Breaking the Bertrand Trap," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 82(C).
    8. Dilaysu ÇINAR, 2018. "€Œpay What You Want Pricing Strategy†As A New Sales Promotion Method - An Experimental Study On Food And Beverage Businesses," Turkish Journal of Marketing, Ali ÇaÄŸlar Çakmak, vol. 3(2), pages 1-19.
    9. Yuxin Chen & Oded Koenigsberg & Z. John Zhang, 2017. "Pay-as-You-Wish Pricing," Marketing Science, INFORMS, vol. 36(5), pages 780-791, September.
    10. Tobias Regner & Gerhard Riener, 2017. "Privacy Is Precious: On the Attempt to Lift Anonymity on the Internet to Increase Revenue," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(2), pages 318-336, June.
    11. Roggentin, Agnes Sophie, 2019. "Applicability of Pay-What-You-Want to High-Value Goods – A Case Study," Marketing Review St.Gallen, Universität St.Gallen, Institut für Marketing und Customer Insight, vol. 36(5), pages 56-63.
    12. Gerpott Torsten J., 2016. "A review of the empirical literature on Pay-What-You-Want price setting," Management & Marketing, Sciendo, vol. 11(4), pages 566-596, December.
    13. Epstein, D.S. & Barton, C. & Mazza, D. & Woode, M.E. & Mortimer, D., 2020. "Patient chosen gap payments in primary care: Predictions of patient acceptability, uptake and willingness to pay from a discrete choice experiment," Social Science & Medicine, Elsevier, vol. 263(C).
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    More about this item

    Keywords

    Warm glow; Price discrimination; Social norm; Charity; Monopoly;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers

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