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.