Pay-What-You-Want Pricing: Can It Be Profitable?
Journal of Behavioral and Experimental Economics (Forthcoming)
27 Pages Posted: 3 May 2014 Last revised: 28 Oct 2015
Date Written: April 29, 2014
Using a game theoretic framework, we show that not only can pay-what-you-want 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 cost parameters, namely the marginal cost parameter for the seller, and the social preference parameter of a consumer to incorporate behavioral considerations for paying too little compared to her reference price.
Keywords: Pay-What-You-Want, Behavioral Game Theory, Monopoly
JEL Classification: C70, D03, D21, D42
Suggested Citation: Suggested Citation