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

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