The Performance of Pay-as-You-Wish Pricing with Relational and Forward-looking Customers

This paper examines the economic payoffs to sellers and buyers from the pay-as-you-wish (PAYW) pricing strategy, which allows buyers to choose the amount of payment at will. We argue that under PAYW, self-interested buyers choose a positive amount of payment as a support for the business model. We show that PAYW can also help sellers to improve their profits because of the approximation of PAYW to the first-degree price discrimination. Using a stylized model, we compare the performance of PAYW with that of the fixed-price pricing strategy. We also provide an explanation to the payment dispersion under PAYW from the behavioral perspective and an analysis of the role of the marginal cost.