Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2015:27: Pay-What-You-Want in Competition

Margaret Samahita ()
Additional contact information
Margaret Samahita: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: Pay-What-You-Want (PWYW) pricing schemes are popular in certain industries and not others. We model the seller's choice of pricing scheme under various market structures assuming consumers share their surplus. We show that the profitability and popularity of PWYW depend not only on consumers' preferences, but also on market structure, product characteristics and sellers' strategies. While there is no equilibrium where PWYW dominates the market, given a sufficiently high level of surplus-sharing and product differentiation, it is chosen by the second mover to avoid Bertrand competition. The equilibrium results and their associated market characteristics are consistent with empirical examples of PWYW.

Keywords: Pay-what-you-want; competition; product differentiation; market behavior; market structure

JEL-codes: D11; D42; D43; L11; L12; L13

85 pages, September 15, 2015

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