The Pay-What-You-Like Business Model: Warm Glow Revenues and Endogenous Price Discrimination
22 Pages Posted: 21 May 2010
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Toward an Understanding of the Economics of Charity: Evidence from a Field Experiment
By Craig E. Landry, Andreas Lange, ...
-
What's Psychology Worth? A Field Experiment in the Consumer Credit Market
By Marianne Bertrand, Dean S. Karlan, ...
-
What's Psychology Worth? A Field Experiment in the Consumer Credit Market
By Dean Karlin, Marianne Bertrand, ...
-
Does Price Matter in Charitable Giving? Evidence from a Large-Scale Natural Field Experiment
By Dean S. Karlan and John A. List
-
Does Price Matter in Charitable Giving? Evidence from a Large-Scale Natural Field Experiment
By Dean S. Karlan and John A. List
-
Rebates Versus Matching: Does How We Subsidize Charitable Contributions Matter?
-
Charitable Giving and Income Taxation in a Life-Cycle Model: An Analysis of Panel Data
By Gerald Auten, Holger Sieg, ...