Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets

Abstract

Pay What You Want (PWYW) can be an attractive marketing strategy to price discriminate between fairminded 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 in isolation, 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. If given the choice, the majority of sellers opt for setting a posted price rather than a PWYW pricing. We discuss the implications of these results for the use of PWYW as a marketing strategy.

A review of the empirical literature on Pay-What-You-Want price setting

“…The research results quite consistently suggest that normal absolute fixed prices of products or services significantly positively correlate with the absolute amount paid under PWYW conditions and are significantly negatively correlated with the relative PWYW price paid, which is the ratio of voluntary payments amounts to standard fixed market prices of the goods studied (see Table 1; Gahler, 2016;Gautier and Van der Klaauw, 2012;Jang and Chu, 2012;Kim et al, 2014a;León et al, 2012;Machado and Sinha, 2012;Mak et al, 2015;Mills, 2013). In a similar vein, the (absolute) magnitude of voluntarily paid prices increases with the variable and average unit costs of the goods sold in a PWYW context Brought to you by | MIT Libraries Authenticated Download Date | 5/9/18 8:48 PM in case that buyers are informed about these costs in advance of their price setting choice (Greiff et al, 2014;Krämer et al, 2015;Riener, 2008;Schmidt et al, 2015).…”

“…The majority of the em-pirical PWYW studies, which analyze external RP, support these suppositions (Armstrong Soule and Madrigal, 2015;Gautier and Van der Klaauw, 2012 (in case of incidental customer encounters with PWYW offers); Jang and Chu, 2012; (in case of hypothetical payments); Kim et al, 2014a;Krawczyk et al, 2015;Lee et al, 2011Lee et al, , 2015León et al, 2012;Parvinen et al, 2013;Perfecto et al, 2013;Perfecto et al, 2014;Pöyry and Parvinen, 2014;Pöyry et al, 2013;Regner and Barria, 2009;Riener, 2008). Furthermore, several PWYW studies, in which customers were provided with information on the variable production costs of the goods offered, find significantly positive correlations between the level of the stated direct costs -which can be regarded as a special variant of external RP -and the level of voluntary customer payments (Jang and Chu, 2012;Kim et al, 2014a;Krämer et al, 2015;Schmidt et al, 2015; for an insightful theoretical analysis of this association see Greiff et al, 2014). In light of these results, it is not surprising that earlier reviews of the empirical PWYW literature summarize the state of the evidence as follows: "the provision of external reference prices in the form of a regular or suggested price usually has a positive impact on the prices paid [voluntarily]" (Stegemann, 2014, p. 33; for similar summaries see Gahler, 2016, p. 31;Pöyry, 2015, p. L-28).…”

“…Otherwise, in contexts where customers pay before consumption satisfaction is likely to exert a clear influence on prices paid only if buyers are already very familiar with the peculiarities of the purchased service or product and have therefore formed a stable evaluation of the offering and/or its supplier. A total of nine studies find that buyer satisfaction is significantly positively correlated with prices paid voluntarily after consumption (see Table 1: Borck et al, 2006;Gautier and Van der Klaauw, 2012;Kim et al, 2009Kim et al, , 2014aLeón et al, 2012;Machado and Sinha, 2012;Racherla et al, 2011;Riener, 2008;Schmidt et al, 2015). Solely, Drevs (2013) and Schons et al (2014) observe no significant association between the two variables.…”

“…The studies of Gneezy et al (2010), Machado and Sinha (2012), Riener (2008), Morwitz (2011, 2013) and Schmidt et al (2015) contain additional mainly casuistic and qualitative evidence regarding the higher "cognitive effort" (MendozaAbarca and Mellema, 2016, p. 120) triggered by the PWYW method in comparison with fixed prices. The reason for the higher effort imposed on consumers in a PWYW setting is that buyers have to think more for themselves about a price which fairly factors in currently charged market prices as well as the costs and interests of sellers.…”

“…The most prominent "indirect" financial outcomes of PWYW pricing are additional revenues that a supplier generates through stimulating demand for other and potentially more expensive products or services which typically complement the goods sold at PWYW (e.g., drinks served with a meal in a restaurant). The empirical literature occasionally mentions such cross-and upselling effects of the PWYW method (Gneezy et al, 2010;Kim et al, 2009Kim et al, , 2010bKim et al, , 2014aKim et al, , 2014bSchmidt et al, 2015;Steiner, 1997). However, these effects have not yet been the focus of systematic empirical investigation.…”