DP10605 Delegating Pricing Power to Customers: Pay What You Want or Name Your Own Price

Author(s): Florentin Krämer, Klaus M. Schmidt, Martin Spann, Lucas Stich
Publication Date: May 2015
Keyword(s): competitive strategies, consumer-driven pricing mechanisms, name your own price, pay what you want
JEL(s): D03, D21, D22, D40, L11, M31
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10605

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.