IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v136y2017icp125-140.html
   My bibliography  Save this article

Delegating pricing power to customers: Pay What You Want or Name Your Own Price?

Author

Listed:
  • Krämer, Florentin
  • Schmidt, Klaus M.
  • Spann, Martin
  • Stich, Lucas

Abstract

Pay What You Want (PWYW) and Name Your Own Price (NYOP) are customer-driven pricing mechanisms that give customers (some) pricing power. Both have been used in service industries with high fixed costs to price discriminate without setting a reference price. Their participatory and innovative nature gives rise to promotional benefits that do not accrue to posted-price sellers. We explore the nature and effects of these benefits and compare PWYW and NYOP using controlled lab experiments. We show that PWYW is a very aggressive strategy that achieves almost full market penetration. It can be profitable if there are promotional benefits and if marginal costs are low. In contrast, NYOP can be used profitably also if marginal costs are high and if there are no such benefits. It reduces price competition and segments the market. In a second experiment, we generate promotional benefits endogenously. We show that PWYW monopolizes the follow-up market but fails to be profitable. NYOP is less successful in penetrating the market but yields much higher profits.

Suggested Citation

  • Krämer, Florentin & Schmidt, Klaus M. & Spann, Martin & Stich, Lucas, 2017. "Delegating pricing power to customers: Pay What You Want or Name Your Own Price?," Journal of Economic Behavior & Organization, Elsevier, vol. 136(C), pages 125-140.
  • Handle: RePEc:eee:jeborg:v:136:y:2017:i:c:p:125-140 DOI: 10.1016/j.jebo.2017.01.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268117300306
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christian Terwiesch & Sergei Savin & Il-Horn Hann, 2005. "Online Haggling at a Name-Your-Own-Price Retailer: Theory and Application," Management Science, INFORMS, vol. 51(3), pages 339-351, March.
    2. Hinz, Oliver & Hann, Il-Horn & Spann, Martin, 2011. "Price Discrimination in E-Commerce? An Examination of Dynamic Pricing in Name-Your-Own-Price Markets Management Information Systems Quarterly (MISQ)," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 56546, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    3. Ryan O. Murphy & Kurt A. Ackerman & Michel J. J. Handgraaf, 2011. "Measuring social value orientation," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 6(8), pages 771-781, December.
    4. Regner, Tobias & Barria, Javier A., 2009. "Do consumers pay voluntarily? The case of online music," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 395-406, August.
    5. Scott Fay & Juliano Laran, 2009. "Implications of Expected Changes in the Seller's Price in Name-Your-Own-Price Auctions," Management Science, INFORMS, vol. 55(11), pages 1783-1796, November.
    6. Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 7-22, January.
    7. Regner, Tobias & Riener, Gerhard, 2012. "Voluntary payments, privacy and social pressure on the internet: A natural field experiment," DICE Discussion Papers 82, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    8. Klaus M. Schmidt & Martin Spann & Robert Zeithammer, 2015. "Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets," Management Science, INFORMS, vol. 61(6), pages 1217-1236, June.
    9. Scott Fay, 2004. "Partial-Repeat-Bidding in the Name-Your-Own-Price Channel," Marketing Science, INFORMS, vol. 23(3), pages 407-418, February.
    10. Fay, Scott & Lee, Seung Hwan (Shawn), 2015. "The role of customer expectations in name-your-own-price markets," Journal of Business Research, Elsevier, vol. 68(3), pages 675-683.
    11. Gurumurthy Kalyanaram & Russell S. Winer, 1995. "Empirical Generalizations from Reference Price Research," Marketing Science, INFORMS, vol. 14(3_supplem), pages 161-169.
    12. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    13. Mak, Vincent & Zwick, Rami & Rao, Akshay R. & Pattaratanakun, Jake A., 2015. "“Pay what you want” as threshold public good provision," Organizational Behavior and Human Decision Processes, Elsevier, vol. 127(C), pages 30-43.
    14. Min Ding & Jehoshua Eliashberg & Joel Huber & Ritesh Saini, 2005. "Emotional Bidders---An Analytical and Experimental Examination of Consumers' Behavior in a Priceline-Like Reverse Auction," Management Science, INFORMS, vol. 51(3), pages 352-364, March.
    15. Il-Horn Hann & Christian Terwiesch, 2003. "Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel," Management Science, INFORMS, vol. 49(11), pages 1563-1579, November.
    16. Ali E. Abbas & Il-Horn Hann, 2010. "Measuring Risk Aversion in a Name-Your-Own-Price Channel," Decision Analysis, INFORMS, vol. 7(1), pages 123-136, March.
    17. Regner, Tobias, 2014. "Social preferences? Google Answers!," Games and Economic Behavior, Elsevier, vol. 85(C), pages 188-209.
    18. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    19. Chris K. Anderson, 2009. "Setting Prices on Priceline," Interfaces, INFORMS, vol. 39(4), pages 307-315, August.
    20. Tuo Wang & Esther Gal-Or & Rabikar Chatterjee, 2009. "The Name-Your-Own-Price Channel in the Travel Industry: An Analytical Exploration," Management Science, INFORMS, vol. 55(6), pages 968-979, June.
    21. Martin Spann & Robert Zeithammer & Gerald Häubl, 2010. "Optimal Reverse-Pricing Mechanisms," Marketing Science, INFORMS, vol. 29(6), pages 1058-1070, 11-12.
    22. Ju-Young Kim & Katharina Kaufmann & Manuel Stegemann, 2014. "The impact of buyer–seller relationships and reference prices on the effectiveness of the pay what you want pricing mechanism," Marketing Letters, Springer, vol. 25(4), pages 409-423, December.
    23. Kim Ju-Young & Natter Martin & Spann Martin, 2010. "Kish: Where Customers Pay As They Wish," Review of Marketing Science, De Gruyter, vol. 8(2), pages 1-14, July.
    24. Pieter A. Gautier & Bas van der Klaauw, 2012. "Selection in a field experiment with voluntary participation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(1), pages 63-84, January.
    25. Wilfred Amaldoss & Sanjay Jain, 2008. "Joint Bidding in the Name-Your-Own-Price Channel: A Strategic Analysis," Management Science, INFORMS, vol. 54(10), pages 1685-1699, October.
    26. Winer, Russell S, 1986. " A Reference Price Model of Brand Choice for Frequently Purchased Products," Journal of Consumer Research, Oxford University Press, vol. 13(2), pages 250-256, September.
    27. Oliver Hinz & Martin Spann, 2008. "The Impact of Information Diffusion on Bidding Behavior in Secret Reserve Price Auctions," Information Systems Research, INFORMS, vol. 19(3), pages 351-368, September.
    28. Scott Fay, 2009. "Competitive reasons for the Name-Your-Own-Price channel," Marketing Letters, Springer, vol. 20(3), pages 277-293, September.
    29. Dmitry Shapiro, 2011. "Profitability of the Name-Your-Own-Price Channel in the Case of Risk-Averse Buyers," Marketing Science, INFORMS, vol. 30(2), pages 290-304, 03-04.
    30. Johnson, Jennifer Wiggins & Cui, Annie Peng, 2013. "To influence or not to influence: External reference price strategies in pay-what-you-want pricing," Journal of Business Research, Elsevier, vol. 66(2), pages 275-281.
    31. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-279, May.
    32. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Greiff, Matthias & Egbert, Henrik, 2016. "A Survey of the Empirical Evidence on PWYW Pricing," MPRA Paper 68693, University Library of Munich, Germany.
    2. Gerpott, Torsten J. & Schneider, Christina, 2016. "Buying behaviors when similar products are available under pay-what-you-want and posted price conditions: Field-experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 65(C), pages 135-145.
    3. Samahita, Margaret, 2015. "Pay-What-You-Want in Competition," Working Papers 2015:27, Lund University, Department of Economics.

    More about this item

    Keywords

    Customer-driven pricing mechanisms; Pay What You Want; Name Your Own Price; Competitive strategies; Marketing; Laboratory experiment;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:136:y:2017:i:c:p:125-140. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jebo .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.