Feasibility and Strategic Value of Pay-What-You-Want Pricing Under Different Market Structures

Abstract

The literature has always examined the feasibility of PWYW pricing under a single market structure and has paid less attention to the strategic value of PWYW pricing. These studies have focused on consumers’ payment decisions while ignoring sellers’ pricing decisions. To fill these gaps, we design a laboratory experiment based on a sample of 192 Chinese undergraduate students to comprehensively and systematically examine the feasibility and strategic value of PWYW pricing under three different market structures. The results show that PWYW pricing is more feasible for sellers in monopolistic markets than in competitive markets because buyers in monopolistic markets hold stronger intention-based and outcome-based social preferences; PWYW pricing can help sellers achieve a higher level of profitability when additional gains are available and the average production cost or marginal cost is low; whether PWYW sellers can cover the entire market depends on the market structure; and the PWYW seller can significantly reduce the average profit of the fixed-pricing seller, which may force the latter out of the market in the long run. These findings will advance our understanding of the feasibility and strategic value of PWYW pricing. In addition, this paper also contributes to the PWYW literature by creatively designing an experiment with three market structures.

Plain language summary

Pay-What-You-Want (PWYW) pricing allows buyers to make payments to sellers in any quantity (even zero). It is widely used in museums, hotels, e-commerce, and other industries with great profitability. How is this possible? One of the reasons is that people are not completely self-interested and consider the interests of others, which means people have social preferences. We find that the degree of buyers’ social preferences varies with the market structures. Therefore, we design an experiment to examine how changes in market structure affect the degree of buyers’ social preferences, how changes in the degree of buyers’ social preferences affect buyers’ and sellers’ decisions (e.g., buyers’ willingness to pay), and how these decisions affect the feasibility of PWYW pricing. The findings show that PWYW pricing is more feasible in monopolistic markets because buyers are willing to pay more; when additional gains are available or the cost of the product is low, PWYW pricing can help sellers achieve profitability; and PWYW pricing can be used as an aggressive strategy to drive out competitors. However, when interpreting and applying these findings, it is important to note that country or cultural differences may weaken the generality of these findings.

Keywords

PWYW pricing social preference altruism reciprocity fairness

Introduction

Pay-what-you-want (PWYW) is a participative pricing scheme in which a seller completely delegates the pricing power to any buyer and is only responsible for offering products, and once the buyer specifies a price, the seller cannot refuse it (J.-Y. Kim et al., 2009; Wagner, 2019). Consumers have historically been given the right to set prices under this pricing scheme, which attracts the interest of business and academics. PWYW was used by the British band Radiohead to sell their new album online in 2007 (Schmidt et al., 2015); HumbleBundle sold a variety of products using PWYW and made money (Jung et al., 2014); PWYW is also used by China’s live online show, known in Chinese as “Dashang,” which originally referred to rewarding street performers voluntarily (Wan et al., 2022). In all actual cases, many consumers are willing to pay more than nothing, and some companies have long been profitable (Boonsiritomachai & Sud-on, 2021; Chung, 2017; J.-Y. Kim et al., 2009; Mak et al., 2015; Schons et al., 2014). Therefore, there must be some factors that make PWYW pricing feasible.

As is well known, consumer behavior systematically deviates from the situation predicted by neoclassical economics, and social preferences theory provides a richer and more realistic explanation for understanding consumer behavior (Natter & Kaufmann, 2015; Spann et al., 2018), such as intention-based reciprocity (Rabin, 1993), inequity aversion (Fehr & Schmidt, 1999), and altruism (Andreoni & Miller, 2002). Many empirical studies discover that social preferences can enhance consumers’ willingness to pay (Krzyżanowska & Tkaczyk, 2016; Natter & Kaufmann, 2015). However, when using PWYW, the seller may encounter free-riding behavior by consumers, which is a concern that cannot be disregarded (Chao et al., 2015). Some self-interested consumers’ payments will cause the PWYW seller’s profit to be smaller than it would be under fixed pricing. Therefore, it is too early to say whether PWYW is feasible.

The literature has paid less attention to the strategic value of PWYW pricing and has always examined the feasibility of PWYW pricing under a single market structure. Therefore, in this paper, we creatively and systematically design three market structures, including a flexible seller who can choose fixed or PWYW pricing competing with a fixed-pricing seller, a PWYW seller competing with a fixed-pricing seller, and only one PWYW seller (monopolist), to examine the feasibility (including the willingness of PWYW sellers to enter the market, the profitability of PWYW pricing, the amount of buyers’ voluntary payments and what factors influence buyers’ voluntary payments) and strategic value (such as maximizing market penetration and driving rivals out of the market as a competitive strategy) of PWYW pricing from the perspective of social preferences theory. This paper divides the interaction between consumers and sellers into two stages: first, sellers make decisions on pricing and market entry; second, consumers decide the amount to pay. This paper makes another contribution by using Chinese samples to conduct a laboratory experiment. The remainder of this paper is arranged as follows. After a literature review, we propose the hypotheses to be tested based on the theories of rational economic man and social preferences, introduce the experimental procedure, and finally discuss the experimental results.

Literature Review

Participative Pricing

A participative pricing implies that buyers have partial pricing power in the transaction process (J.-Y. Kim et al., 2009). The two most popular forms of participative pricing are PWYW and NYOP (name your own price). A PWYW pricing model permits buyers to pay any amount (even zero) to the seller without a threshold price (J.-Y. Kim et al., 2009; Wagner, 2019). It is also known as PAYW (pay as you wish; Chen et al., 2017), PWYL (pay what you like; Isaac et al., 2015), Dashang (Wan et al., 2022), etc. Dashang, a payment method currently active in the Chinese Internet, refers to the audience giving an amount of virtual currency or virtual gifts to content providers, and such payment is noncompulsory, so it is essentially equivalent to PWYW. Similarly, NYOP is a pricing scheme in which the buyer specifies a price, but the seller sets a threshold price that the buyer does not know, and the transaction will only take place when the buyer’s bid exceeds the threshold price (Spann & Tellis, 2006).

Other participative pricing schemes related to PWYW include PIF (pay it forward), donation, PYP (pick your price), etc. PIF means voluntary payment in the name of another person, while PWYW is payment in the name of the payer. Jung et al. (2014) referred to PIF and PWYW collectively as consumer elective pricing. Donation is a voluntary contribution made by a person or group to nonprofit organization or private institution, usually in the form of cash, time, other assets, or services (Ariely et al., 2009). Sometimes donation occurs independently of market transactions and is noncommercial, sometimes it is equivalent to PWYW because people can pay as much as they want in the name of a donation after acquiring a service, and sometimes it is bundled with traditional fixed pricing, such as a promise by a seller to give a portion of the amount paid by the customer to charity (Butz & Harbring, 2022). PYP enables a buyer to select a price he or she wishes to pay from a list of prices. Compared to PWYW, PYP reduces the buyer’s decision cost but does not permit the buyer to freely bid (C. X. Wang et al., 2021). An interesting voluntary payment called tipping originated from the manor owner thanking the servants for their hard work and rewarding them with change. To avoid the waiters’ jealousy and resentment, the ancient European drinkers would also give the waiters a small amount of change at the end of consumption so that the waiters also had money to buy wine, which, of course, was a voluntary behavior. Tipping is different from PWYW; it is not a payment incurred by a customer to obtain products or services but an incentive for the service staff (not the seller; Azar, 2020; Natter & Kaufmann, 2015).

PWYW Pricing

Many empirical and theoretical studies show that PWYW pricing can be feasible for sellers with good performance. First, PWYW pricing can help a seller obtain higher revenues and profits than fixed pricing while also improving market efficiency (Chao et al., 2015; J.-Y. Kim et al., 2009). Second, many consumers pay more than zero, and the average PWYW price is higher than the regular price. A common explanation for this is that consumers have social preferences that motivate their payment behavior. In addition, reference or anchor prices also influence consumers’ payment levels (Gneezy et al., 2010; Gross et al., 2021; Kukla-Gryz & Zagórska, 2017, 2018; Wagner, 2019). Third, PWYW pricing can also help sellers obtain consumer information (such as willingness to pay), promote their own reputation, make consumers feel fairer and trust the quality of products, which in turn brings word-of-mouth effects and spillover effects of complementary products (Boonsiritomachai & Sud-on, 2021; B. C. Kim et al., 2022; J.-Y. Kim et al., 2009; Krämer et al., 2017).

Furthermore, some factors constrain the implementation of PWYW pricing, such as repetition of interaction, reference prices, and self-image. In repetitive interactions, a consumer has an incentive to keep the seller in the market and therefore pays at a higher level; however, in a one-shot interaction, the speculative mentality of a consumer may dominate, resulting in a lower level of payment (J.-Y. Kim et al., 2009; Krämer et al., 2017). Some consumers forgo buying because paying less than the appropriate or reasonable level will embarrass them. They must choose the payment amount themselves, and whether the amount is suitable will have a positive or negative impact on their self-image (Gerpott, 2016; Gneezy et al., 2010; C. X. Wang et al., 2021). Some consumers prefer to choose the price rather than specify it themselves, especially when there is no obvious reference price (Spann et al., 2018). Only when buyers have high social preferences and the product’s marginal cost is low can sellers implementing PWYW perform better (Chao et al., 2015; J.-Y. Kim et al., 2009).

While PWYW pricing cannot immediately result in profitability for a seller under specific conditions, it can bring some strategic value to a seller. PWYW can help a seller achieve endogenous price discrimination where various buyers pay different prices for the same product without the PWYW seller imposing exogenously different prices on them and avoids the problem that a buyer may refuse to pay a higher price for a product when he or she finds that the same product is sold to others at a lower price (J.-Y. Kim et al., 2009; Schmidt et al., 2015). There is no maximum price set in PWYW pricing, so consumers with high preferences can choose to pay a very high price. PWYW pricing can attract all consumers and achieve full market coverage (J.-Y. Kim et al., 2009; Krämer et al., 2017), although some scholars hold different views on this topic (Schmidt et al., 2015). Furthermore, PWYW pricing can significantly reduce the profitability of fixed-pricing sellers, which will drive fixed-pricing sellers out of the market (Krämer et al., 2017).

Prior studies typically assume that consumers (must) interact with a unique PWYW seller with whom no other seller competes, implying that they are in a monopolistic market (e.g., Boonsiritomachai and Sud-on, 2021; Gross et al., 2021). This mainstream study design ignores real transaction scenarios where consumers can not only buy PWYW-priced products but also choose fixed-price products (Gerpott, 2016). Several papers set the research context as a PWYW seller competing with a NYOP seller (Krämer et al., 2017) or a PWYW seller competing with a fixed-pricing seller (Chao et al., 2019; B. C. Kim et al., 2022). Obviously, these studies examine the feasibility of PWYW pricing under a single market structure, and the corresponding findings may lack generality. These studies focus on consumers’ payment decisions while ignoring sellers’ pricing decisions (choosing PWYW, fixed pricing or others). To fill these gaps, we design a laboratory experiment to comprehensively and systematically examine the feasibility and strategic value of PWYW pricing under three different market structures and investigate both sellers’ pricing decisions and buyers’ purchasing decisions.

Social Preferences

Neoclassical economics assumes that people are rational and self-interested and they will pay zero to maximize their benefits in PWYW pricing. Therefore, such a market will not exist, buyers will not pay, and PWYW sellers will not enter the market (Krämer et al., 2017; Schmidt et al., 2015). However, studies in behavioral and experimental economics demonstrate that people also have social preferences (J.-Y. Kim et al., 2014; Levitt & List, 2007). When participants in experiments have varying degrees of social preferences, they repeatedly choose not to maximize their economic gains, suggesting that people also care about the interests of others (Schmidt et al., 2015).

A man living on a desert island can be a perfectly rational economic man, making decisions without considering the interests of others. However, once he returns to human society, he will no longer be a purely economic man, and self-interest, fairness, reciprocity, and emotions are intertwined to influence his behavior in society. At this time, a person has not only individual rationality but also “sociality” (Dong, 2022; Gintis, 2009). People consider not only what material gains and losses their actions will bring but also whether their actions are consistent with the role they play in society (Bowles & Gintis, 2011; Gintis, 2017). Sociality is the “bound of rationality” (Dong, 2022; Gintis, 2009).

Behavioral economics refers to personal sociality as social preferences, pro-sociality (Carpenter, 2010) or other-regarding preferences (Gintis, 2017), and so forth. Rabin (1993) pioneered a theoretical model of intention-based reciprocity preference to explain the widespread phenomenon of mutual benefit in social life, which was recognized as the first theoretical model of social preferences. Subsequently, Camerer (1997) proposed for the first time the complete concept of social preferences, which included altruistic, reciprocity and fairness preferences. The meanings of the three preferences are as follows.

Altruistic preference is expressed as social-welfare preference, meaning that a person not only cares about his own interest but also cares about the level of total social welfare, that is, his own benefit is positively correlated with the benefits of others in his utility function (Andreoni & Miller, 2002; Kerschbamer, 2015). Fairness preference manifests in people’s motivation to reduce the difference between their gains and those of others, that is, the pursuit of fairness in outcomes, sacrificing themselves to help others when they are ahead in gains and engaging in “Pareto-loss” behaviors to harm others when they are behind (Bolton & Ockenfels, 2000; Fehr & Schmidt, 1999). Reciprocity preference assumes that some people will reciprocate the friendly intentions conveyed by the friendly behavior of others, even at a cost, and vice versa (Dufwenberg & Kirchsteiger, 2004; Rabin, 1993; Segal & Sobel, 2007). Altruism and fairness are output-based social preferences, while reciprocity is an intention-based social preference. The above theories of social preferences have been repeatedly demonstrated by many experimental studies (Diaz et al., 2023; Kerschbamer, 2015; Narwal & Rai, 2022), and their external validity has been verified (X. Wang & Navarro-Martinez, 2023). This paper is mainly concerned with the above three social preferences.

Theoretical Hypotheses

Feasibility of PWYW Pricing

A positive price will be paid voluntarily, according to social preferences theories, but these theories have different explanations for why consumers do so and under what circumstances they are prepared to pay more. For the purpose of examining the feasibility of PWYW, it is critical to understand which theory supports consumer behavior.

According to outcome-based theories of social preferences, including fairness (Fehr & Schmidt, 1999) and altruism (Andreoni & Miller, 2002), consumers will pay more when they receive more surpluses from the products and the seller’s production cost is higher. According to the intention-based reciprocity model (Rabin, 1993), if a seller uses PWYW pricing to sell products, consumers may perceive this as friendly behavior and be willing to pay a high price in return. This theory holds that consumers’ payments are determined by the seller’s behavior or intention rather than the seller’s welfare or exogenous changes in costs and benefits. However, the buyer will not increase the level of payment if there is an increase in the valuation of products not related to the seller’s behaviors (Fehr & Schmidt, 2006).

The reputation mechanism can also explain why self-interested consumers pay positive prices to PWYW sellers (Brown et al., 2004). To maximize their benefits, self-interested consumers pay positive prices in the early stages of interaction with a PWYW seller to establish a good reputation for themselves on the one hand, and on the other hand, self-interested consumers want to keep the PWYW seller in the market and thus continue to obtain the products or services it offers. In a finitely repeated game, self-interested consumers motivated by reputation mechanisms reduce the level of voluntary payments in later stages.

All the above theories assume that consumers’ social preferences are heterogeneous, so these theoretical models are not mutually exclusive (Andreoni & Miller, 2002). Accordingly, the following experimental hypotheses are given: Consumers pay zero if they are purely self-interested, and no sellers enter the market to sell. However, if at least one of the following mechanisms is in action, a seller with PWYW pricing can make profits and achieve price discrimination:

Hypothesis 1a: If PWYW pricing brings additional gains to a seller, the seller prefers PWYW pricing over fixed pricing.

Hypothesis 1b: If the buyer is driven by intention-based reciprocity, the average PWYW price will be more than zero and greater than the PWYW seller’s average production cost.

Hypothesis 1c: If consumers possess outcome-based social preferences (e.g., altruism, fairness preferences), the higher the consumers’ valuation of the products and the higher the seller’s cost, the higher the PWYW price they will pay.

Hypothesis 1d: Even if influenced by the reputation mechanism, the PWYW price paid by self-interested and rational consumers will still gradually decrease over the course of the experiment. However, if consumers are driven by intention-based reciprocity, the level of voluntary payments is likely to increase gradually over the course of the experiment.

Market Penetration

If the market structure is competitive, a consumer motivated by altruism or fairness preferences is likely to buy from the fixed-pricing seller when his or her voluntary payment level is greater than the fixed price. In addition, because consumers do not have a clear idea of a “reasonable level of payment,” they refuse to buy from the PWYW seller and switch to the fixed-pricing seller (Gerpott, 2016; Gneezy et al., 2012; C. X. Wang et al., 2021). Therefore, the PWYW seller cannot achieve full market penetration in the competitive market. Under a monopolistic market structure, a consumer motivated by outcome-based social preferences or intention-based reciprocity will buy from the PWYW seller when his or her valuation is greater than the PWYW seller’s average production cost, making it likely that the PWYW seller will cover all potential consumers. When the consumer’s valuation is strictly below the PWYW seller’s average production cost, some consumers motivated by intention-based reciprocity will not buy from the PWYW seller because they care about the welfare of the PWYW seller, or they wish to reciprocate the seller’s friendly behavior by not purchasing. Therefore, we propose the following hypothesis:

Hypothesis 2: Given that buyers’ valuations are greater than the average production costs, PWYW pricing can maximize market penetration in a monopolistic market with only one PWYW seller, but cannot maximize market penetration in a competitive market consisting of one fixed-pricing seller and one PWYW seller.

Competitive Strategy

When a competitor uses fixed pricing, PWYW pricing can be used as an aggressive strategy to drive the fixed-pricing seller out of the market if many consumers are motivated by outcome-based social preferences or intention-based reciprocity and pay positive prices. Conversely, if consumers lack social preferences, the PWYW seller is forced to shift to fixed pricing, and the market will be in a fixed-pricing duopoly equilibrium, that is, the Bertrand price competition model, where both have zero profit (Chen et al., 2017; Krämer et al., 2017). Therefore, we propose the following hypothesis:

Hypothesis 3: If consumers are motivated by outcome-based social preferences or intention-based reciprocity and pay a high PWYW price on average, the PWYW seller will drive the fixed-pricing seller out of the market; if consumers lack social preferences, then there will exist a duopoly equilibrium, where both sellers use fixed pricing and have zero profit.

Methods

General Setup

A between-subjects design with market structure as the single independent variable is used in the experiment. Based on the type of market structure, a total of three experimental treatments are available in the experiment. (1) In Treatment 1, a fixed-pricing seller competes with a flexible seller who can choose fixed pricing or PWYW pricing. (2) In Treatment 2, a seller still adopts fixed pricing, and the other is restricted to using PWYW pricing. (3) In Treatment 3, there is only one monopolistic PWYW seller. In each treatment, a subject is allocated a role (seller or buyer) at random and remains unchanged throughout the experiment. There are four sessions for competition treatments (Treatments 1 and 2) and four sessions for the monopoly treatment (Treatment 3), with 24 subjects in each session. Therefore, a total of 192 subjects participate in this experiment. In Treatments 1 and 2 (where competition exists), every 24 subjects constitute three independent markets, each consisting of two sellers and six buyers. In Treatment 3, every 24 subjects constitute 6 independent markets, each consisting of 1 seller and 3 buyers. Every session has 24 periods, and buyers and sellers are randomly rematched every period.

To reflect the direct and indirect gains that PWYW pricing brings to the seller, including media coverage, word of mouth effects, promotion of complementary products and network externalities (B. C. Kim et al., 2022; J.-Y. Kim et al., 2009; Krzyżanowska & Tkaczyk, 2016; Natter & Kaufmann, 2015), this experiment assigns a seller with PWYW pricing a chance to receive additional gains $g \in {0, \bar{g}}$ per unit of product sold. This experiment randomly assigns $\bar{g}$ to 50% of all markets to examine the effect generated by the gains. The PWYW seller knows whether to receive additional gains, and the buyer only knows that the seller has a 50% chance of receiving the gains. This setting actually makes it more difficult for the PWYW seller to make profits. Therefore, if there are specific factors that make PWYW pricing feasible and induce customers to pay a positive price under anonymous conditions, these factors will also have a significant effect in the real world (Krämer et al., 2017).

The experiment was carried out at the university where the authors worked, and all operations were completed by computers. Subjects interacted with each other anonymously through the computer network, with no private communication between them. A total of 192 students (M_age = 21.72 years, SD = 1.61) participated in the experiment, of whom 104 were male and 88 were female. Each session lasted for about 130 min. The experimental design followed value induction theory to better control the seller’s cost and the consumer’s valuation (Smith, 1976). The appearance fee for each subject was 5 RMB, and additional performance compensation was given based on the cumulative profit or surplus value earned by each subject, for an average total compensation of 14 RMB per subject. This study did not include minors under 18 years of age and passed ethical review by the university’s research ethics committee, and all participants provided written informed consent to participate in the experiment.

Experimental Procedure and Arrangement

The transaction procedure associated with PWYW pricing consists of two interrelated stages. First, a seller decides to sell products by PWYW or fixed pricing, and a consumer decides whether to purchase the products under PWYW or fixed pricing. Second, the consumer choosing to buy from the PWYW seller decides on the amount to pay.

Treatment 1: Flexible Seller Versus Fixed-Pricing Seller

In this treatment, a fixed-pricing seller competes with a flexible seller who can choose fixed pricing or PWYW pricing. All participants are aware of the product’s average production cost at the start of the experiment, and the two sellers have the same average production cost, which is randomly chosen from $c \in {10, 30, 50}$ . Each buyer knows his or her own valuation of a unit of product, and this valuation is private information and is taken separately from $\in {10, 25, 40, 60, 120, 200}$ . The flexible seller knows the additional per-unit gains $g \in {0, 40}$ from employing PWYW pricing. The flexible seller then decides which pricing mechanism to use once each seller decides whether to enter the market. Finally, each buyer choos es which of the two sellers as his or her provider after deciding whether to buy. If a buyer chooses buying from the fixed-pricing seller, he or she pays a fixed price; if he or she chooses the PWYW seller to buy, he or she can pay any price including zero. The decisions and actions executed by each participant in Treatment 1 and their sequences are shown in Figure 1.

Figure 1.

Sequence of events in Treatment 1.

The profit of any seller who does not enter the market is zero. If seller i, whose average production cost is c, sells a product using a fixed price $P^{FP}$ , its total profit is given by

π_{i}^{FP} = \sum_{j = 1}^{6} 1_{j}^{i} (P^{FP} - c)

(1)

in which $1_{j}^{i}$ is an indicator function. When buyer j decides to buy from seller i, it takes a value of 1; otherwise, it is equal to 0. Since there are two sellers and six buyers in each market, the value of j ranges from 1 to 6 as an integer. If seller i uses PWYW pricing, its profit is

π_{i}^{PWYW} = \sum_{j = 1}^{6} 1_{j}^{i} (P_{j}^{PWYW} - c + g)

(2)

where $P_{j}^{PWYW}$ is the price paid by buyer j to the PWYW seller and g represents the additional gains per unit received by the PWYW seller. If the transaction occurs, buyer j receives a surplus value of ( $v_{j} - P$ ), where $v_{j}$ refers to buyer j’s valuation of the product and P refers to $P_{j}^{PWYW}$ or $P^{FP}$ ; otherwise, the surplus value is equal to 0.

Treatment 2: PWYW Seller Versus Fixed-Pricing Seller

In this treatment, a PWYW seller competes with a fixed-pricing seller. The fixed-pricing seller’s profit is shown in Equation 1, and the PWYW seller’s profit is shown in Equation 2 if they enter the market. If the transaction occurs, buyer j’s surplus value is still equal to ( $v_{j} - P$ ).

Treatment 3: Monopolistic PWYW Seller

In this treatment, there is only one seller that uses PWYW pricing, and if this seller enters the market, there will be three buyers available. Here, a buyer’s valuation is selected at random from $v \in {40, 60, 120, 200}$ . Compared to Treatments 1 and 2, a buyer’s valuation misses 2 values of 10 and 25 because the buyer can only obtain the product from the only seller in this treatment. The monopolistic seller has the same cost and gains as the sellers in the previous two treatments and knows this information before entering the market. The temporal order of decision-making and actions of each participant in Treatment 3 is shown in Figure 2.

Figure 2.

Sequence of events in Treatment 3.

The total profit of PWYW seller i is

π_{i} = {\begin{matrix} \sum_{j = 1}^{3} 1_{j} (P_{j}^{PWYW} - c + g), if the seller enters the market \\ 0, if the seller does n^{'} t enter the market \end{matrix}

(2)

in which $1_{j}$ is an indicator function. When buyer j decides to buy from seller i, it takes a value of 1; otherwise, it is equal to 0. The surplus value of buyer j is still equal to ( $v_{j} - P$ ).

Results and Discussion

The presentations and discussions of the experimental results are arranged according to the experimental hypotheses. We first examine the feasibility of PWYW pricing, and then investigate whether PWYW pricing can achieve strategic objectives such as maximizing market penetration and driving competitors out of the market.

Feasibility of PWYW Pricing

Result 1. The flexible seller in Treatment 1 chooses PWYW pricing when PWYW pricing provides additional gains and the average production cost is low, and almost all PWYW sellers in Treatments 2 and 3 choose to enter the market.

Table 1 provides support for Result 1. When the additional gains to the PWYW seller are greater than the average production cost, that is, when g = 40 and c = 10 or 30, both the percentage of flexible sellers choosing PWYW pricing and the percentage of PWYW sellers choosing to enter the market are almost 100% because PWYW sellers are safely able to achieve profitability. When g = 40, the percentage of flexible sellers choosing PWYW pricing in Treatment 1 is 70.83% in total, and the percentages of PWYW sellers choosing to enter the market in Treatments 2 and 3 are 83.33% and 88.89% respectively. Thus PWYW sellers in monopoly market are more willing to enter the market under this condition. When g = 0, the percentage of flexible sellers choosing PWYW pricing or PWYW sellers choosing to enter the market decreases as the average production cost increases, indicating that sellers are reluctant to adopt PWYW pricing or refuse to enter the market out of fear of losing money due to buyers’ unwillingness to pay positive prices. At this point, the percentage of flexible sellers choosing PWYW pricing in Treatment 1 is only 4.17% in total, and the percentages of PWYW sellers who choose to enter the market in Treatments 2 and 3 are 26.39% and 26.04%, respectively. When g = 0 and c = 50, almost no sellers choose PWYW pricing or refuse to enter the market. The above results confirm Hypothesis 1a that the seller prefers PWYW pricing over fixed pricing if PWYW pricing brings additional gains to a seller. The results are also consistent with the findings of many prior studies. For example, the adoption of PWYW pricing by museums leads to a certain word-of-mouth effect (a form of additional gain) and thus better profits (Boonsiritomachai & Sud-on, 2021).

Table 1.

Percentage of Flexible Sellers Choosing PWYW Pricing and Percentage of PWYW Sellers Choosing to Enter the Market.

Cost	Treatment 1^aPercentage of flexible sellers choosing PWYW pricing		Treatment 2Percentage of PWYW sellers choosing to enter market		Treatment 3Percentage of PWYW sellers choosing to enter market
Cost	g = 0	g = 40	g = 0	g = 40	g = 0	g = 40
c = 10	6.67%	100%	43.33%	100%	50.83%	100%
c = 30	3.33%	100%	20%	100%	10.83%	98.61%
c = 50	0%	12.5%	0%	60%	2.08%	67.71%
Total	4.17%	70.83%	26.39%	83.33%	26.04%	88.89%

Given that flexible sellers choose to enter the market. In fact, the percentage of flexible sellers choosing to enter the market is 100%, regardless of whether they choose fixed pricing or PWYW pricing.

We note that although both Treatment 1 and Treatment 2 are set up as competitive market structures, the percentage of flexible sellers that choose PWYW pricing and enter the market in Treatment 1 is almost invariably lower than the percentage of PWYW sellers that enter the market in Treatment 2, under all conditions. It can be drawn that sellers are more cautious about using PWYW pricing when they have a choice of pricing methods. The fact that few sellers in mature digital product markets use PWYW pricing, despite their freedom to choose pricing methods (B. C. Kim et al., 2022), may support this finding of ours.

Another interesting observation is that the percentage of sellers choosing to implement PWYW pricing in Treatments 1 to 3 is 6.67%, 43.33%, and 50.83% respectively when c = 10 and g = 0; while when c = 50 and g = 40, the percentage of sellers choosing to implement PWYW pricing in Treatments 1 to 3 is 12.5%, 60%, and 67.71%, respectively. Although sellers face the same loss (g-c = −10) per unit, the willingness of sellers to implement PWYW pricing under the latter condition is significantly higher. Krämer et al. (2017) observed a similar phenomenon, which they attributed to the fact that the seller anticipated that the buyer’s payment level would increase as the average cost of production increased. Apparently, this view holds that consumers possess output-based social preferences, that is, the higher the seller’s average cost of production is, the higher the PWYW prices that consumers will voluntarily pay. We think that another reason for this may be the decline in the expected rate of loss (from 100% at c = 10 and g = 0 to 20% at c = 50 and g = 40) because the probability of making a profit in the latter condition is much higher for some economic-man sellers.

Result 2. In all three treatments, the average PWYW price is greater than zero, approximately half of the buyers pay a PWYW price greater than zero, and a significant number of buyers pay a PWYW price greater than or equal to the average production cost. In Treatments 1 and 2, the PWYW seller’s average profit is much greater than the fixed-pricing seller’s average profit. The monopolistic PWYW seller in Treatment 3 also obtains a substantial level of profit. When the additional gains are zero, the average profit of the PWYW seller is less than zero; when the additional gains are 40, the average profit of the PWYW seller is much greater than zero.

Tables 2 and 3 provide support for Result 2. As seen in Table 2, the average PWYW prices paid by buyers in Treatments 1 to 3 are 5.83, 8.21, and 11.50, respectively. Since buyers in a monopoly market are set to hold higher valuations, they pay more on average. The percentages of buyers paying positive prices are 40.98%, 53.19%, and 64.57%, respectively; and in Treatments 1 to 3, the percentages of buyers paying PWYW prices greater than the average production cost are 18.69%, 19.86%, and 36.23%, respectively. This payment distribution is generally consistent with previous studies (Gerpott, 2016; Gneezy et al., 2010; Gross et al., 2021; J.-Y. Kim et al., 2009), but with a slightly higher proportion of buyers paying nothing. Compared to the other two competitive markets, PWYW pricing is more feasible in the monopoly market because more buyers want to pay positive prices, even greater than the average production cost, to keep the only PWYW seller in the market, and Schmidt et al. (2015) holds the same view.

Table 2.

PWYW Prices Paid by Buyers in Three Treatments.

Buyers’ Payments	Treatment 1	Treatment 2	Treatment 3
Average PWYW price	5.83	8.21	11.50
Percentage of buyers paying positive prices	40.98%	53.19%	64.57%
Percentage of buyers who pay a PWYW price greater than or equal to the average production cost	18.69%	19.86%	36.23%

Table 3.

Profits of PWYW Sellers and Fixed-Pricing Sellers in Three Treatments.

Treatment	Profits
	PWYW pricing			Fixed pricing
		g = 0	g = 40	Total
Treatment 1	−20^a	137.04^a	128.31^a	5.98^b
Treatment 2	−43.37^c	102.13^c	67.14^c	24.87^d
Treatment 3	−15.53^c	78.89^c	57.50^c

The percentage of flexible sellers that enter the market is 100%.

Given that the fixed-pricing seller (i.e., a competitor of the flexible seller) enters the market.

Given that the PWYW seller enters the market.

Given that the fixed-pricing seller enters the market.

Overall, approximately half of the buyers in the three treatments voluntarily pay positive prices, and one-fifth to one-third of the buyers voluntarily pay a price greater than the average production cost. The result suggests that many buyers are driven by intention-based reciprocity, as buyers perceive the adoption of PWYW pricing by a seller as a friendly behavior and thus pay positive prices in return. Hypothesis 1b is confirmed. Narwal and Rai (2022) argued that reciprocity beliefs positively influenced buyers’ willingness to pay. Buyers usually reciprocate the seller’s efforts, especially when social pressures exist. These social pressures come from concerns about self-image, social image, etc. Social pressures sometimes cause a buyer to pay more than the level of payment under conditions of pure reciprocity (Jung et al., 2014); but sometimes they also cause the buyer to exit the transaction out of fear of damaging his social identity by failing to pay a sufficient amount (Gneezy et al., 2012). Our experiment is an anonymous, computer based laboratory experiment in which buyers’ reciprocity intention is not influenced by social pressures.

As shown in Table 3, the average profit obtained by PWYW sellers in Treatments 1 to 3 is 128.31, 67.14, and 57.50, respectively, and it should be noted that the lowest average profit of PWYW sellers in Treatment 3 is due to the small size of the market, which contains only one PWYW seller and three buyers. The average profits obtained by PWYW sellers in both Treatments 1 and 2 are greater than the average profits obtained by the fixed-pricing sellers. However, the average profits of PWYW sellers become negative after excluding the additional gains. The average profits of PWYW sellers in Treatments 1 to 3 are −20, −43.37, and −15.53, respectively, when g = 0, which shows that there are many free-riding consumers, making it difficult for PWYW sellers to achieve profitability when there are no additional gains (Chao et al., 2015). It can also be concluded that PWYW pricing will yield a higher level of profit than fixed pricing if the PWYW seller can earn additional gains (Chao et al., 2015; B. C. Kim et al., 2022; J.-Y. Kim et al., 2009). It is difficult for sellers to achieve profitability under PWYW pricing without additional gains, but it is better than the free strategy in this condition because there are buyers paying positive prices in all three markets, confirming the view of Schmidt et al. (2015).

Result 3. The PWYW price paid by a buyer is positively correlated with the average production cost and the buyer’s valuation but is not significantly correlated with the fixed price of the competitor (in Treatments 1 and 2) and the period.

Because the value range of PWYW prices is somewhat limited, Tobit regression is suitable to process the relevant data (Pathak & Gupta, 2022). We set the PWYW price as the dependent variable and the average production cost, the buyer’s valuation, the fixed price (which is not available in Treatment 3) and the period as independent variables, and used Tobit regression to analyze the data. Finally, we obtained the Tobit regression estimates shown in Table 4, including correlation coefficients, standard errors (in parentheses), significance, etc.

Table 4.

Tobit Regression Estimates.

	PWYW price (Treatment 1)	PWYW price (Treatment 2)	PWYW price (Treatment 3)
Average production cost	0.080** (0.119)	0.131** (0.080)	0.217*** (0.041)
Buyer’s valuation	0.061*** (0.020)	0.101*** (0.018)	0.080*** (0.011)
Fixed price	0.053* (0.033)	0.032 (0.038)
Period	0.133 (0.192)	0.199 (0.163)	0.082 (0.096)
Constant	−14.371*** (3.771)	−13.047*** (2.950)	−8.063*** (2.057)
Number of observations	305	423	988

Note. Standard errors in parentheses.

p < .10. **p < .05. ***p < .01.

As shown in Table 4, the PWYW price paid by a buyer is significantly and positively correlated with the average production cost (0.080, p < .05; 0.131, p < .05; 0.217, p < .01) and the buyer’s valuation (0.061, p < .01; 0.101, p < .01; 0.080, p < .01), which confirms Hypothesis 1c. This result shows that a number of buyers in the market are driven by outcome-based social preferences, and PWYW pricing is a mechanism of endogenous price discrimination (Chen et al., 2017; Isaac et al., 2015; J.-Y. Kim et al., 2009; Schmidt et al., 2015), that is, buyers’ payment levels vary with their valuation levels and sellers’ average costs. The correlation coefficient between the PWYW price and the average production cost in Treatment 3 is larger and more significant, which suggests that consumers in the monopolistic markets hold stronger outcome-based social preferences. The PWYW price paid by a buyer is not significantly correlated with the fixed price (in Treatments 1 and 2) and the period, so Hypothesis 1d cannot be confirmed. Unlike this result, Schmidt et al. (2015) found that buyers’ payment levels dropped significantly in the last period.

There may be several reasons why the reputation mechanism is not observed in our experiment. First, the reputation mechanism assumes that participants are economic men (Brown et al., 2004), whereas many participants in this experiment have been shown to hold strong social preferences; second, this experiment is conducted under anonymous and electronically-enabled conditions, which weaken the reputation mechanism (Jin & Kato, 2006). In some studies, the fixed price acts as a reference price and has a significant effect on the level of payments by buyers (Gerpott, 2016; Gross et al., 2021). However, in our experiment, valuations and average production costs known to buyers may act as reference prices, thus diminishing the reference role of fixed prices for buyers. In addition, the effect of reference price on willingness to pay is not an important concern of this study.

Market Penetration

Result 4. In Treatment 3, where the PWYW seller monopolizes the market, almost all buyers become its customers; in Treatments 1 and 2, the PWYW seller has difficulty maximizing market penetration due to the presence of a fixed-pricing competitor. Therefore, whether PWYW pricing can achieve full market penetration depends on the market structure.

Table 5 provides support for Result 4. Given that buyers’ valuations are greater than the average production costs and both the PWYW seller and the fixed-pricing seller enter the market, the PWYW sellers in Treatments 1 and 2 fail to cover the market completely, with 5.22% and 11.84% of the average market share being captured by the fixed-pricing seller, respectively. There are two reasons for this result. First, when buyers motivated by altruism or fairness preferences are willing to pay a higher PWYW price than the fixed price in the market, these buyers may switch to fixed-pricing sellers. Second, some buyers lack a clear understanding of a reasonable payment level and fear that their self-image and identity will be damaged by paying too little. Unfortunately, it is not possible to identify what exactly influences a particular buyer’s purchase decision in Treatments 1 and 2.

Table 5.

Market Share Distribution When a Buyer’s Valuation is Greater Than the Average Production Cost.

Treatment	Market share^a
Treatment	PWYW seller (%)	Fixed-pricing seller (%)
Treatment 1	94.78	5.22
Treatment 2	88.16	11.84
Treatment 3	99.68

Given that a buyer’s valuation is greater than the average production cost.

In the monopolistic markets of Treatment 3, when a buyer’s valuation is greater than the average production cost, the entire market is almost completely penetrated by the PWYW seller, with an average market share of 99.68%. Both the self-interested model and the social-preference model support such decision-making behavior by a buyer. From the perspective of a self-interested rational person, a buyer’s best decision is to buy from the PWYW seller as long as the valuation is greater than the average production cost, because there is no other choice. When faced with a PWYW seller’s friendly intention (referring to the adoption of PWYW pricing), buyers motivated by intention-based reciprocal preferences will buy from the PWYW seller and voluntarily pay a high price even above the average production cost (Hypothesis 1b). Buyers with output-based social preferences also buy from the PWYW seller and the payments increase with their valuations and the average production costs (Hypothesis 1c).

Thus, given that a buyer’s valuation is greater than the average production cost, PWYW pricing can achieve full market penetration in the monopolistic markets, which supports Hypothesis 2. However, in the competitive markets, it is difficult for the PWYW seller to fully penetrate the entire market, and the fixed-pricing seller can still capture a significant share of the market, which does not support Hypothesis 2. Schmidt et al. (2015) argued the same way, but some scholars believed that PWYW pricing could achieve full market coverage (Chen et al., 2017; J.-Y. Kim et al., 2009; Krämer et al., 2017).

More generally, regardless of whether a buyer’s valuation is greater than the average production cost, similar conclusions can be drawn, as shown in Table 6. In Treatment 1, the average market share of the PWYW seller and the fixed-pricing seller is 94.14% and 3.70%, respectively. In Treatment 2, the average market share of the two is 89.24% and 8.02%, respectively. In Treatment 3, the average market share of the monopolistic PWYW seller is 98.89%.

Table 6.

Market Share Distribution Under General Conditions.

Treatment	Market share (1)		Market share (2)
Treatment	PWYW seller	Fixed-pricing seller	Fixed-pricing seller (flexible seller)	Fixed-pricing seller
Treatment 1	94.14%^a (128.31)	3.70%^a (5.98)	33.70%^b (9.6)	29.26%^b (9.03)
Treatment 2	89.24%^a	8.02%^a
Treatment 3	98.89%

Note. The data in parentheses are average profits.

Given that both the PWYW seller and the fixed-pricing seller enter the market.

Given that the flexible seller chooses fixed pricing, it enters the market with another fixed-pricing seller.

Competitive Strategy

Schmidt et al. (2015) argued that in a competitive market, the PWYW seller could not cover the entire market and that some buyers still chose to buy from the fixed-pricing seller. However, Krämer et al. (2017) argued that the PWYW seller could capture the majority of market share and made the average profit of the fixed-pricing seller close to zero, so it could drive the fixed-pricing seller out of the market. These two views are not contradictory, and our findings integrate both of them.

Result 5. PWYW pricing is an aggressive competitive strategy. In terms of market share, the seller can seize most of the market share from the fixed-pricing seller by implementing this strategy, but the fixed-pricing seller can still capture some market share. In terms of profit, the PWYW seller can significantly reduce the average profit of the fixed-pricing seller, so the PWYW seller can pose a strategic threat to the fixed-pricing seller or even drive it out of the market in the long run.

From the perspective of market share, there is no doubt that Schmidt et al. (2015) are correct. Here, we examine another market structure in Treatment 1, that is, Bertrand price competition formed between the flexible seller who chooses the fixed pricing and another fixed-pricing seller. If the flexible seller believes that the buyer lacks social preferences and PWYW pricing will have difficulty achieving profitability, it will choose fixed pricing. The right-hand side of Table 6 shows the market share of the two competitors in this case. The flexible seller who chooses fixed pricing has 33.70% of the market and the fixed-pricing seller has 29.26% of the market, which shows that their shares are approximately equal; the figures in parentheses are the respective average profits of 9.6 and 9.03, which are also approximately equal. Thus, the two sellers constitute a typical Bertrand competition (Chao et al., 2019; Chen et al., 2017). While the flexible seller chooses PWYW pricing to compete with the fixed-pricing seller in Treatment 1, it can be seen from Table 3 or Table 6 that the average profit of the fixed-pricing seller drops to 5.98, which is a significant reduction in profit level. Therefore, from the perspective of profit, the flexible seller using PWYW pricing can effectively reduce the average profit of the fixed-pricing seller, which poses a serious strategic threat to the fixed-pricing seller. Compared to the average profit of the PWYW seller (when additional gains exist), the average profit of the fixed-pricing seller is too low to cover its opportunity cost, which would likely drive the fixed-pricing seller out of the market. Therefore, Hypothesis 3 is confirmed.

Conclusion

From the perspective of social preferences theory, this paper examines the feasibility and strategic value of PWYW pricing under three different market structures by using a laboratory experiment based on Chinese samples, and through the validation of three experimental hypotheses, some important findings and conclusions are drawn.

(1) Compared to fixed pricing, PWYW pricing can help sellers achieve a higher level of profitability when additional gains are available and the average production cost or marginal cost is low. At this point, sellers prefer PWYW pricing over fixed pricing, and Hypothesis 1a is confirmed. This conclusion matches the findings of some prior studies (e.g., Chao et al., 2015; B. C. Kim et al., 2022; J.-Y. Kim et al. 2009). Additionally, compared to PWYW sellers in the two competitive markets, PWYW sellers in the monopolistic markets are more willing to enter the market.

(2) A large number of buyers in three markets volunteer to pay positive prices, and one-fifth to one-third of buyers pay PWYW prices greater than the average production costs, demonstrating that there are many buyers motivated by intention-based reciprocity in the market (Hypothesis 1b). PWYW is more feasible for sellers in the monopolistic markets than in the competitive markets because more buyers want to pay positive prices, even greater than the average production cost, to keep the only PWYW seller in the market. In other words, buyers in the monopolistic markets have stronger intention-based social preferences.

(3) The PWYW prices paid by buyers are significantly and positively correlated with the average production costs and the buyers’ valuations, which proves that many buyers possess outcome-based social preferences (Hypothesis 1c), and buyers in the monopolistic markets hold stronger outcome-based social preferences. Since the price voluntarily paid by a buyer increases with the buyer’s valuation and the average production cost, it is demonstrated that PWYW pricing can achieve endogenous price discrimination (Chen et al., 2017; Schmidt et al., 2015).

(4) Since the PWYW price paid by a buyer is not significantly correlated with the fixed price of the competitor (in Treatments 1 and 2) and the period, it is difficult to determine whether the reputation mechanism and intention-based reciprocity affect the level of the buyer’s voluntary payment as the experiment proceeds, and Hypothesis 1d fails to be verified.

(5) Whether the PWYW seller can penetrate the entire market depends on the market structure, while some scholars believe that PWYW pricing can achieve full market coverage (J.-Y. Kim et al., 2009; Krämer et al., 2017). In the monopolistic market, the only PWYW seller can maximize market penetration; however, in the competitive market, the PWYW seller cannot penetrate the entire market, and the fixed-pricing seller can capture a portion of the market. Hypothesis 2 is confirmed.

(6) In terms of market share, the PWYW seller cannot drive the fixed-pricing seller out of the market in a competitive market; however, in terms of profit, the PWYW seller can significantly reduce the average profit of the fixed-pricing seller, which may force the latter out of the market in the long run. If buyers lack social preferences or there are no additional gains for PWYW sellers, the flexible seller will shift to fixed pricing and engage in a Bertrand price competition with another fixed-pricing seller, and then both parties will have similar market shares and average profits. Therefore, Hypothesis 3 is confirmed.

Our study makes the following theoretical contributions. First, while previous studies usually examine the feasibility of PWYW pricing under one or two type of market structures (e.g., Gerpott, 2016; B. C. Kim et al., 2022; J.-Y. Kim et al., 2009), our study investigates the feasibility and strategic value of PWYW pricing under three different market structures. Second, this study not only points out that PWYW pricing is more feasible in a monopoly market, but also reveals the underlying reason for this result, which is that the difference in market structure affects social preferences of buyers and buyers in a monopoly market have stronger social preferences (both intention-based and output-based preferences). Third, whether a PWYW seller can cover the entire market depends on the market structure. It is easier for the PWYW seller to achieve complete market coverage in a monopoly market. Fourth, regarding the strategic value of PWYW pricing, this paper proposes an integrative view, that is, although in the short run, a PWYW seller in a competitive market cannot fully cover the entire market, it can significantly reduce the profit of a fixed-pricing seller, and thus in the long run the PWYW seller is expected to drive a fixed-pricing seller out of the market. Fifth, compared to Chao et al. (2019), this study identifies that the root cause leading to the formation of Bertrand competition is buyers’ lack of social preferences or no additional gains for PWYW sellers.

Our findings help sellers to improve the implementation of PWYW pricing. First, our experiments reconfirm that a large number of buyers hold social preferences and are willing to pay positive prices. A seller can use PWYW pricing when the marginal or average cost faced by the seller is low and the seller can obtain some additional gains. For example, sellers of digital products (e.g., software) have low marginal costs and additional gains such as network externality (other additional gains include media coverage, word of mouth effects, promotion of complementary products), making them well suited to use PWYW pricing. Coincidentally, The Zero Marginal Cost Society, written by Rifkin (2014), held that with the improvement of social productivity, the marginal cost of various products would approach zero, which indicated that the PWYW scheme might be popular in the future.

Furthermore, sellers should note that differences in market structure affect the strength of buyers’ social preferences, which in turn affect their willingness to pay. Generally speaking, a seller is able to make better profits and fully penetrate the market in a monopoly, where buyers hold stronger social preferences; if the seller is in a competitive market, where buyers’ social preferences are slightly weaker, the seller cannot hope to realize profits in the short run through the implementation of PWYW pricing, but if the seller’s aim is to sacrifice immediate profits for market share, it should adopt PWYW pricing because PWYW pricing can help it to capture the entire market by expelling the fixed-pricing seller. In the digital or network economy, network externality is a widespread phenomenon that leads to winner-take-all. Firms often sacrifice short-run profits in order to rapidly expand their market share and become the largest “network.” This was the case, for example, in the early days of e-tailers such as Amazon.com. Once the firm became a market monopolist and gained economies of scale and market power, it began to focus on profitability. Thus, PWYW pricing is well applicable to the digital or network economy.

Inevitably, there are some limitations in this study. (1) In general, the internal validity of laboratory experiment is high, but the external validity may be low, and there may be many differences between school students exchanging virtual products in the laboratory and real market situations (Schmidt et al., 2015). (2) When interpreting and applying the findings of this study, it is important to note that country or cultural differences may weaken the generality of these findings. This paper is based on Chinese samples, but cultural differences can affect the consumer’s decision-making process and thus the level of voluntary payments (Kukla Gryz et al., 2022). Therefore, the relevant findings of this study cannot be directly applied in other countries, and cross-cultural comparative research based on PWYW pricing can be further conducted.

Footnotes

ORCID iD

Wei Chen

Ethical Considerations

This study was approved by the Research Ethics Committee of Jiaying University.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This study is supported by Guangdong Provincial Philosophy and Social Sciences Planning Project “Research on the Cause, Mechanism and Countermeasure of Value Co-Destruction” (Grant number GD21CGL17).

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Data Availability Statement

The datasets generated during and/or analyzed during the current study are available from the corresponding author on reasonable request.

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