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The Pay-What-You-Like Business Model: Warm Glow Revenues and Endogenous Price Discrimination

22 Pages Posted: 21 May 2010  

R. Mark Isaac

Florida State University - Department of Economics

John P. Lightle

Florida State University - Department of Economics

Douglas A. Norton

Florida State University - Department of Economics

Date Written: May 21, 2010

Abstract

We explore the potential benefits of an up-and-coming business model called "pay-what-you-like" in an environment where consumers experience a warm glow by patronizing a particular firm. We show that, given a social norm regarding minimum contributions, a pay-what-you-like firm should announce a minimum suggested contribution, which is positive – but smaller than the profit-maximizing single price – so as to benefit from "endogenous price discrimination," whereby consumers differentially contribute more than the suggested minimum. Furthermore, a pay-what-you-like scheme can improve market efficiency by drastically reducing deadweight loss relative to a single price scheme. These results are robust to alternate motivations for generosity, including gift-exchange.

Keywords: pay-what-you-like, warm glow, price discrimination, social norm, charity, monopoly

JEL Classification: L11, D42, D03, D64

Suggested Citation

Isaac, R. Mark and Lightle, John P. and Norton, Douglas A., The Pay-What-You-Like Business Model: Warm Glow Revenues and Endogenous Price Discrimination (May 21, 2010). Available at SSRN: https://ssrn.com/abstract=1612951 or http://dx.doi.org/10.2139/ssrn.1612951

Robert Mark Isaac

Florida State University - Department of Economics ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States
850-644-7081 (Phone)
850-644-4535 (Fax)

John P. Lightle (Contact Author)

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States

Douglas A. Norton

Florida State University - Department of Economics ( email )

Tallahasse, FL 32306
United States

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