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Pay-What-You-Want Pricing Under Competition: Breaking the Bertrand Trap

28 Pages Posted: 24 Oct 2017  

Yong Chao

University of Louisville - College of Business - Department of Economics

Jose M. Fernandez

University of Louisville - Department of Economics; University of Louisville - College of Business and Public Administration

Babu Nahata

University of Louisville - College of Business - Department of Economics

Date Written: October 23, 2017

Abstract

This paper investigates the viability of Pay-What-You-Want (PWYW) pricing when firms compete without restrictions of a minimum payment requirement. We show that the equilibrium outcomes are different when underpayers, consumers paying less than marginal cost, are present as opposed to when they are absent. In particular, when PWYW pricing is practiced without restricting the presence of underpayers or any minimum payment requirement, then the only two equilibrium structures are: either both firms use the posted price and earn zero profits, or one firm adopts PWYW pricing and the other uses the posted price. The asymmetric pricing equilibrium leads to a softening of price competition where both firms earn positive profits and the Bertrand Trap is broken.

Keywords: Pay-What-You-Want Pricing, Competition, Bertrand Trap

JEL Classification: L13, D9

Suggested Citation

Chao, Yong and Fernandez, Jose M. and Nahata, Babu, Pay-What-You-Want Pricing Under Competition: Breaking the Bertrand Trap (October 23, 2017). Available at SSRN: https://ssrn.com/abstract=3057674

Yong Chao (Contact Author)

University of Louisville - College of Business - Department of Economics ( email )

Louisville, KY 40292
United States
(502)852-3573 (Phone)
(502)852-7672 (Fax)

HOME PAGE: http://yongchao.us

Jose Fernandez

University of Louisville - Department of Economics ( email )

Louisville, KY 40292
United States
(502) 852-4861 (Phone)

HOME PAGE: http://louisville.edu/~jmfern02/

University of Louisville - College of Business and Public Administration ( email )

Louisville, KY 40292
United States

Babu Nahata

University of Louisville - College of Business - Department of Economics ( email )

Louisville, KY 40292
United States
502-852-4864 (Phone)

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