IDEAS home Printed from https://ideas.repec.org/a/eee/soceco/v57y2015icp176-185.html
   My bibliography  Save this article

Pay-what-you-want pricing: Can it be profitable?

Author

Listed:
  • Chao, Yong
  • Fernandez, Jose
  • Nahata, Babu

Abstract

Using a game theoretic framework, we show that not only can pay-what-you-want pricing generate positive profits, but it can also be more profitable than charging a fixed price to all consumers. Further, whenever it is more profitable, it is also Pareto-improving. We derive conditions in terms of two cost parameters, namely the marginal cost parameter for the seller, and the social preference parameter of a consumer to incorporate behavioral considerations for paying too little compared to her reference price.

Suggested Citation

  • Chao, Yong & Fernandez, Jose & Nahata, Babu, 2015. "Pay-what-you-want pricing: Can it be profitable?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 57(C), pages 176-185.
    • Handle: RePEc:eee:soceco:v:57:y:2015:i:c:p:176-185
    DOI: 10.1016/j.socec.2014.09.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S2214804314000998
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.socec.2014.09.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

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

    References listed on IDEAS

    as
    1. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    2. 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.
    3. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    4. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
    5. David R Just & Brian Wansink, 2011. "The Flat-Rate Pricing Paradox: Conflicting Effects of "“All-You-Can-Eat"” Buffet Pricing," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 193-200, February.
    6. Winer, Russell S, 1986. "A Reference Price Model of Brand Choice for Frequently Purchased Products," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 13(2), pages 250-256, September.
    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. 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.
    2. Park, Sangkon & Nam, Sohyun & Lee, Jungmin, 2017. "Charitable giving, suggestion, and learning from others: Pay-What-You-Want experiments at a coffee shop," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 66(C), pages 16-22.
    3. Mills, Paul & Groening, Christopher, 2021. "The role of social acceptability and guilt in unethical consumer behavior: Following the crowd or their own moral compass?," Journal of Business Research, Elsevier, vol. 136(C), pages 377-388.
    4. 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.
    5. 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.
    6. 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).
    7. Reisman, Richard & Payne, Adrian & Frow, Pennie, 2019. "Pricing in consumer digital markets: A dynamic framework," Australasian marketing journal, Elsevier, vol. 27(3), pages 139-148.
    8. Christoph Feldhaus & Tassilo Sobotta & Peter Werner, 2019. "Norm Uncertainty and Voluntary Payments in the Field," Management Science, INFORMS, vol. 65(4), pages 1855-1866, April.
    9. Tudón M., José F., 2015. "Pay-what-you-want because I do not know how much to charge you," Economics Letters, Elsevier, vol. 137(C), pages 41-44.
    10. Fraiman, Daniel, 2022. "A self-organized criticality participative pricing mechanism for selling zero-marginal cost products," Chaos, Solitons & Fractals, Elsevier, vol. 158(C).
    11. 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.
    12. 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.
    13. 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.
    14. Rabbanee, Fazlul K. & Roy, Rajat & Sharma, Piyush, 2022. "Contextual differences in the moderating effects of price consciousness and social desirability in pay-what-you-want (PWYW) pricing," Journal of Business Research, Elsevier, vol. 141(C), pages 13-25.
    15. Emili Vizuete-Luciano & Oktay Güzel & José M. Merigó, 2023. "Bibliometric research of the Pay-What-You-Want Topic," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 22(5), pages 413-426, October.
    16. Bitsch, Linda & Hanf, Jon & Hildenbrand, Andreas & Pabst, Evelyn & Schilling, Ulrich, 2017. "Partizipative Preissetzung bei Weinverkostungen: Ein Pay-What-You-Want-Experiment," 57th Annual Conference, Weihenstephan, Germany, September 13-15, 2017 261994, German Association of Agricultural Economists (GEWISOLA).
    17. Stangl, Brigitte & Kastner, Margit & Prayag, Girish, 2017. "Pay-what-you-want for high-value priced services: Differences between potential, new, and repeat customers," Journal of Business Research, Elsevier, vol. 74(C), pages 168-174.
    18. Martin Spann & Robert Zeithammer & Marco Bertini & Ernan Haruvy & Sandy D. Jap & Oded Koenigsberg & Vincent Mak & Peter Popkowski Leszczyc & Bernd Skiera & Manoj Thomas, 2018. "Beyond Posted Prices: the Past, Present, and Future of Participative Pricing Mechanisms," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 121-136, March.
    19. Geneviève Bassellier & Jui Ramaprasad, 2023. "All External Reference Prices Are Not the Same: How Magnitude, Source, and Fairness Shape Payment for Digital Goods," Information Systems Research, INFORMS, vol. 34(4), pages 1761-1774, December.
    20. Bart Neuts, 2020. "Mixed pricing strategies in museums: Examining the potential of voluntary contributions for capturing consumer surplus," Tourism Economics, , vol. 26(1), pages 115-136, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andreas Leibbrandt, 2016. "Behavioral Constraints on Pricing: Experimental Evidence on Price Discrimination and Customer Antagonism," CESifo Working Paper Series 6214, CESifo.
    2. Jozsef Sakovics, 2007. "Reference price distortion," Edinburgh School of Economics Discussion Paper Series 177, Edinburgh School of Economics, University of Edinburgh.
    3. Becker-Peth, Michael & Thonemann, Ulrich W., 2016. "Reference points in revenue sharing contracts—How to design optimal supply chain contracts," European Journal of Operational Research, Elsevier, vol. 249(3), pages 1033-1049.
    4. Andrea Isoni, 2011. "The willingness-to-accept/willingness-to-pay disparity in repeated markets: loss aversion or ‘bad-deal’ aversion?," Theory and Decision, Springer, vol. 71(3), pages 409-430, September.
    5. Pranav Jindal, 2015. "Risk Preferences and Demand Drivers of Extended Warranties," Marketing Science, INFORMS, vol. 34(1), pages 39-58, January.
    6. Dmitri Kuksov & Kangkang Wang, 2014. "The Bright Side of Loss Aversion in Dynamic and Competitive Markets," Marketing Science, INFORMS, vol. 33(5), pages 693-711, September.
    7. Richards, Timothy J. & Liaukonyte, Jura & Streletskaya, Nadia A., 2016. "Personalized pricing and price fairness," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 138-153.
    8. József Sákovics, 2011. "Reference distorted prices," Quantitative Marketing and Economics (QME), Springer, vol. 9(4), pages 339-363, December.
    9. Committee, Nobel Prize, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    10. Vincze, János & Koltay, Gábor, 2009. "Fogyasztói döntések a viselkedési közgazdaságtan szemszögéből [Consumer decisions from the angle of behavioural economics]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 495-525.
    11. Ranjit M. Christopher & Fernando S. Machado, 2019. "Consumer response to design variations in pay-what-you-want pricing," Journal of the Academy of Marketing Science, Springer, vol. 47(5), pages 879-898, September.
    12. Richards, Timothy & Liaukonyte, Jura & Nadia, Streletskya, 2016. "Personalized Pricing and Price Fairness," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235809, Agricultural and Applied Economics Association.
    13. Mengyuan Zhou, 2022. "Does the Source of Inheritance Matter in Bequest Attitudes? Evidence from Japan," Journal of Family and Economic Issues, Springer, vol. 43(4), pages 867-887, December.
    14. David R. Bell & Jeongwen Chiang & V. Padmanabhan, 1999. "The Decomposition of Promotional Response: An Empirical Generalization," Marketing Science, INFORMS, vol. 18(4), pages 504-526.
    15. Mengyuan Zhou, 2019. "The Effect of the Source of Inheritance on Bequest Attitudes: Evidence from Japan," Keio-IES Discussion Paper Series 2019-018, Institute for Economics Studies, Keio University.
    16. Karle, Heiko & Schumacher, Heiner & Vølund, Rune, 2023. "Consumer loss aversion and scale-dependent psychological switching costs," Games and Economic Behavior, Elsevier, vol. 138(C), pages 214-237.
    17. Vera Popva, 2010. "What renders financial advisors less treacherous? - On commissions and reciprocity -," Jena Economics Research Papers 2010-036, Friedrich-Schiller-University Jena.
    18. Yuval Arbel & Danny Ben-Shahar & Stuart Gabriel, 2016. "Are The Disabled Less Loss Averse? Evidence From A Natural Policy Experiment," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 1291-1318, April.
    19. Sliwka, Dirk & Werner, Peter, 2016. "How Do Agents React to Dynamic Wage Increases? An Experimental Study," IZA Discussion Papers 9855, Institute of Labor Economics (IZA).
    20. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.

    More about this item

    Keywords

    Pay-what-you-want; Monopoly; Behavioral economics; Voluntary payment;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

    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:soceco:v:57:y:2015:i:c:p:176-185. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620175 .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.