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Pay-What-You-Want Pricing Schemes: A Self-Image Perspective

Kahsay, Goytom Abraha and Samahita, Margaret LU (2014) In Working Papers, Department of Economics, Lund University
Abstract
Pay-What-You-Want (PWYW) pricing schemes are becoming increasingly popular in a wide range of industries. We develop a model incorporating self-image into the buyer's utility function and introduce heterogeneity in consumption utility and image-sensitivity, which generates different purchase decisions and optimal prices across individuals. When a good is sold at a fixed price higher than a threshold value, a price that the individual thinks is fair, the adoption of PWYW increases his utility and hence results in a weakly higher purchase rate. When a good is sold at a fixed price lower than this threshold, however, PWYW can lead to a lower utility. This may result in a lower purchase rate and higher average price, in line with previously... (More)
Pay-What-You-Want (PWYW) pricing schemes are becoming increasingly popular in a wide range of industries. We develop a model incorporating self-image into the buyer's utility function and introduce heterogeneity in consumption utility and image-sensitivity, which generates different purchase decisions and optimal prices across individuals. When a good is sold at a fixed price higher than a threshold value, a price that the individual thinks is fair, the adoption of PWYW increases his utility and hence results in a weakly higher purchase rate. When a good is sold at a fixed price lower than this threshold, however, PWYW can lead to a lower utility. This may result in a lower purchase rate and higher average price, in line with previously unexplained evidence from field experiments. Moreover, an increase in the threshold value decreases the buyer's utility and may further lower the purchase rate, possibly resulting in a further increase in purchase price. Using simple assumptions of quadratic self-image function and uniformly distributed individual preferences, we investigate the conditions under which PWYW yields higher total welfare. (Less)
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author
organization
publishing date
type
Working Paper
publication status
published
subject
keywords
pay-what-you-want, self-image, fairness, voluntary contribution
in
Working Papers, Department of Economics, Lund University
language
English
LU publication?
yes
id
0b0551f8-aaa0-4d64-8507-88ca38e9de38 (old id 4446584)
date added to LUP
2014-05-20 16:31:58
date last changed
2016-10-07 15:04:55
@misc{0b0551f8-aaa0-4d64-8507-88ca38e9de38,
  abstract     = {Pay-What-You-Want (PWYW) pricing schemes are becoming increasingly popular in a wide range of industries. We develop a model incorporating self-image into the buyer's utility function and introduce heterogeneity in consumption utility and image-sensitivity, which generates different purchase decisions and optimal prices across individuals. When a good is sold at a fixed price higher than a threshold value, a price that the individual thinks is fair, the adoption of PWYW increases his utility and hence results in a weakly higher purchase rate. When a good is sold at a fixed price lower than this threshold, however, PWYW can lead to a lower utility. This may result in a lower purchase rate and higher average price, in line with previously unexplained evidence from field experiments. Moreover, an increase in the threshold value decreases the buyer's utility and may further lower the purchase rate, possibly resulting in a further increase in purchase price. Using simple assumptions of quadratic self-image function and uniformly distributed individual preferences, we investigate the conditions under which PWYW yields higher total welfare.},
  author       = {Kahsay, Goytom Abraha and Samahita, Margaret},
  keyword      = {pay-what-you-want,self-image,fairness,voluntary contribution},
  language     = {eng},
  series       = {Working Papers, Department of Economics, Lund University},
  title        = {Pay-What-You-Want Pricing Schemes: A Self-Image Perspective},
  year         = {2014},
}