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

Abstract

Pay What You Want (PWYW) and Name Your Own Price (NYOP) are customerdriven pricing mechanisms that give customers (some) pricing power. Both have been used in service industries with high fixed capacity costs in order to appeal to additional customers by reducing prices without setting a reference price. In this experimental study we compare the functioning and the performance of these two pricing mechanisms. We show that both mechanisms can be successfully used to endogenously price discriminate.PWYW can be very successful if there is an additional promotional benefit to using PWYW and if marginal costs are not too high. PWYW is a very aggressive competitive strategy that achieves almost full market penetration. NYOP is a less aggressive strategy that can also be used if marginal costs are high. It reduces price competition and segments the market. Low valuation customers are more likely to use NYOP while high valuation customers prefer a posted price seller.JEL Classification Numbers: D03, D21, D22, D40, L11, M31

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).…”

“…Exceptions are the laboratory experiments of Krämer et al (2015) and . They show that the presence of competitors using conventional fixed prices has a negative effect on the level of price that PWYW buyers pay.…”

The Influence of Marketing, Promotion and Reputation Strategies on Purchasing Decisions in Savings and Loans Cooperatives in South Tangerang

“…This method finally talks to the public that a product is worthy to be chosen because of excellence or other reasons. Marketing a product requires communication tools or media to introduce the product to the target market (Jiménez-Asenjo & Filipescu, 2019;Krämer et al, 2017;Varadarajan, 2020). This communication tool to connect producers and consumers is called promotion.…”

Buyer and seller data from pay what you want and name your own price laboratory markets

“…The major findings based on the data presented here are reported in the paper "Delegating Pricing Power to Customers: Pay What You Want or Name Your Own Price?" (Krämer et al, 2017) [3].…”