Delegating pricing power to customers: Pay What You Want or Name Your Own Price?

• Published in: Journal of economic behavior & organization Vol. 136; pp. 125 - 140
• Main Authors: Krämer, Florentin, Schmidt, Klaus M., Spann, Martin, Stich, Lucas
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.04.2017
• Subjects: Competitive strategies; Customer-driven pricing mechanisms; Laboratory experiment; Marketing; Name Your Own Price; Pay What You Want; D40; D21; Pay What You Want; D22; Customer-driven pricing mechanisms; D03; Name Your Own Price; M31; Competitive strategies; Laboratory experiment; L11; Marketing
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2017.01.019

•We compare the nature and effects of PWYW and NYOP using lab experiments.•PWYW is very aggressive, achieves full market penetration, and is profitable only if there are promotional benefits.•NYOP is less aggressive, segments the market, and reduces price competition.•It can be used profitably if marginal costs are high and if there are no promotional benefits.•In a second experiment promotional benefits are generated endogenously. 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.