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

40 Pages Posted: 19 May 2015

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: May 2015

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 capacity costs in order to appeal to additional customers by reducing prices without setting a reference price. In this experimental study we compare the functioning and the performance of these two pricing mechanisms. We show that both mechanisms can be successfully used to endogenously price discriminate. PWYW can be very successful if there is an additional promotional benefit to using PWYW and if marginal costs are not too high. PWYW is a very aggressive competitive strategy that achieves almost full market penetration. NYOP is a less aggressive strategy that can also be used if marginal costs are high. It reduces price competition and segments the market. Low valuation customers are more likely to use NYOP while high valuation customers prefer a posted price seller.

Keywords: competitive strategies, consumer-driven pricing mechanisms, name your own price, pay what you want

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 (May 2015). CEPR Discussion Paper No. DP10605, Available at SSRN: https://ssrn.com/abstract=2608063

Florentin Krämer (Contact Author)

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

Ludwigstrasse 28
Munich, D-80539
Germany

Klaus M. Schmidt

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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