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

Beyond Posted Prices: the Past, Present, and Future of Participative Pricing Mechanisms

“…On the other hand, PWYW also connects with other participative pricing mechanisms such as NYOP. Recently, the experimental research by Krämer et al (2017) has noted how both NYOP and PWYW can achieve different degrees of price discrimination as well as market penetration in a competitive market, complementing similar work on PWYW by Schmidt et al (2015).…”

“…Moreover, the falling costs of implementing a participative pricing mechanism, such as an auction, have broadened the scope of participative mechanisms from their historical niche applications to almost all mainstream consumer products such as durables and services (Pinker, Seidmann, and Vakrat 2003). The scope broadening is not limited to auctions-new pricing techniques in which the buyer takes center stage, such as name-your-own-price (NYOP) or paywhat-you-want (PWYW), have emerged, both online and in traditional brick-and-mortar retail environments (Krämer et al 2017).…”

Behavioral biases in marketing

“…Although a niche mechanism, many examples of sellers applying PWYW can be found in various industries, such as the music industry, gastronomy, or entertainment (Krämer et al 2017). Much research focuses on the behavioral drivers that influence payments.…”

Pay-What-You-Want in Competition

“…Our results on consumer preferences and the good's characteristics are in line with previous studies. A low marginal cost is a standard requirement for a seller to be able to sustain PWYW (Chao et al, 2015;Chen et al, 2009;Kim et al, 2013;Krämer et al, 2015), along with a sufficiently high adherence to fairness norms (see Armstrong Soule and Madrigal (2015); Chao et al (2015), among others). The introduction of a charity component to PWYW in particular has mixed effects in the literature: while Gneezy et al (2010) report higher profits relative to a charity component on a fixed-price good, the argument outlined in Gneezy et al (2012), and modelled in Kahsay and Samahita (2015), is that the pro-social component increases the perceived fair price of the good, thus potentially leading to an increase in the average price at the expense of purchase rate.…”