The Pay-What-You-Want game: What can be learned from the experimental evidence on dictator and trust games?

Abstract

This paper introduces the Pay-What-You-Want game which represents the interaction between a buyer and a seller in a Pay-What-You-Want (PWYW) situation. The PWYW game embeds the dictator game and the trust game as subgames. This allows us to use previous experimental studies with the dictator and the trust game to identify three factors that can influence the success of PWYW pricing in business practice: (i) social context, (ii) social information, and (iii) deservingness. Only few cases of PWYW pricing for a longer period of time have been documented. By addressing repeated games, we isolate two additional factors which are likely to contribute to successful implementations of PWYW as a long term pricing strategy. These are (iv) communication and (v) the reduction of goal conflicts. The central contribution of this study is an attempt to bridge the gap between laboratory experiments and the research on PWYW pricing, which relies largely on evidence from the field. By reviewing the relevant experiments, this study identifies factors crucial for the success of PWYW pricing and provides guidance to developing long-term applications of PWYW pricing.