Pay-what-you-want pricing: Can it be profitable?

• We endogenize the choice of pricing strategies – PWYW price vs. fixed price.
• We specify consumer utility to account for both economic and behavioral factors.
• PWYW captures the deadweight loss under uniform pricing to gain additional profit.
• PWYW earns higher profits when marginal cost is low and behavioral factors are high.
• PWYW is attractive if price setting costs are high or the market size is small.

Using a game theoretic framework, we show that not only can pay-what-you-want pricing generate positive profits, but it can also be more profitable than charging a fixed price to all consumers. Further, whenever it is more profitable, it is also Pareto-improving. We derive conditions in terms of two cost parameters, namely the marginal cost parameter for the seller, and the social preference parameter of a consumer to incorporate behavioral considerations for paying too little compared to her reference price.