Pay-As-You-Wish Pricing

Firms frequently use a curious pricing mechanism called "pay as you wish" pricing (PAYW). When PAYW is used, a firm let consumers decide what a product is worth to them and how much they want to pay to get the product. This practice has been observed in a number of industries. In this paper, we theoretically investigate why and where PAYW can be a profitable pricing strategy relative to the conventional "pay as asked" pricing strategy (PAAP). We show that PAYW has a number of advantages over PAAP such that it is well suited for some industries but not for others. These advantages are: 1) PAYW helps a firm to maximally penetrate a market; 2) it allows a firm to price discriminate among heterogenous consumers; 3) it helps to moderate price competition. We derive conditions under which PAYW dominates PAAP and discuss ways to improve the profitability of PAYW.