Delegating Pricing Power to Customers: Pay What You Want or Name Your Own Price?

47 Pages Posted: 9 May 2015 Last revised: 21 Jan 2017

See all articles by Florentin Krämer

Florentin Krämer

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Martin Spann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Lucas Stich

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: January 20, 2017

Abstract

Pay What You Want (PWYW) and Name Your Own Price (NYOP) are customer-driven pricing mechanisms that give customers (some) pricing power. Both have been used in service industries with high fixed costs to price discriminate without setting a reference price. Their participatory and innovative nature gives rise to promotional benefits that do not accrue to posted-price sellers. We explore the nature and effects of these benefits and compare PWYW and NYOP using controlled lab experiments. We show that PWYW is a very aggressive strategy that achieves almost full market penetration. It can be profitable if there are promotional benefits and if marginal costs are low. In contrast, NYOP can be used profitably also if marginal costs are high and if there are no such benefits. It reduces price competition and segments the market. In a second experiment, we generate promotional benefits endogenously. We show that PWYW monopolizes the follow-up market but fails to be profitable. NYOP is less successful in penetrating the market but yields much higher profits.

Keywords: Customer-driven pricing mechanisms, Pay What You Want, Name Your Own Price, Competitive Strategies, Marketing, Laboratory Experiment

JEL Classification: D03, D21, D22, D40, L11, M31

Suggested Citation

Krämer, Florentin and Schmidt, Klaus M. and Spann, Martin and Stich, Lucas, Delegating Pricing Power to Customers: Pay What You Want or Name Your Own Price? (January 20, 2017). Available at SSRN: https://ssrn.com/abstract=2604050 or http://dx.doi.org/10.2139/ssrn.2604050

Florentin Krämer

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Klaus M. Schmidt (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 3405 (Phone)
+49 89 2180 3510 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Martin Spann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Ludwigstr. 28
Munich, 80539
Germany

Lucas Stich

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Ludwigstr. 28
Munich, 80539
Germany

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