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