Business Commons^™

Pay-What-You-Want Pricing: Can It Be Profitable?, Yong Chao, Jose Fernandez, Babu Nahata

Yong Chao

Using a game theoretic framework, we show that not only can pay-what-you-want (PWYW) 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 parameters, namely the marginal cost of production and the psychological cost of the consumer for paying too little compared to her reference price.

The paper makes the following contributions to the existing literature. First, we endogenize the choice of pricing strategies—PWYW vs. fixed price. Thus rather than solely focusing on the …

Vertical Probabilistic Selling: The Role Of Consumer Anticipated Regret, Yong Chao, Lin Liu, Dongyuan Zhan

Yong Chao

This paper studies vertical probabilistic selling (mixing products with different qualities) when firms compete, and consumers have different abilities to anticipate the potential post-purchase regret raised by the possibility of obtaining the inferior products. We show that, when consumers have either no or full ability to anticipate the regret, probabilistic selling emerges only when the product differentiation between firms is intermediate. However, when consumers have partial ability to anticipate the regret, probabilistic selling will arise more often and yield higher profit compared with the previous two cases. This is due to the “reverse quality discrimination”: the perceived quality of the …