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

Pay What You Want (PWYW) can be an attractive marketing strategy to
price discriminate between fair-minded 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.