Title: A pay-what-you-want pricing model for restaurants

Authors: Vinaysingh Chawan

Addresses: Operations Management and Quantitative Techniques Area, Indian Institute of Management Indore, B-201, Faculty Block B, IIM Indore Campus, Prabandh Shikhar, Rau, Indore 453331, Madhya Pradesh, India

Abstract: A new method of pricing, known as pay-what-you-want (PWYW) has been successfully used in many contexts in the recent past. Success stories are in restaurants, museums, music albums, software, etc. The method where the buyer selects the price, possibly a zero price, and the seller accepts it, is a bit counter intuitive. Quite surprisingly, the PWYW pricing method has been used successfully, and some businesses have adopted it for selling their goods. We study the economic rationale behind the success of the PWYW pricing method, and analyse different situations using a simple model. Results show that the PWYW pricing method can be successful when there is a large proportion of fair-minded consumers, and a lesser proportion of free-loaders. Also, though a low marginal cost is beneficial for a PWYW method, it is not necessary. Sellers can choose to use PWYW pricing with reference prices that induce, but not bind, consumers to pay an appropriate price. Also, setting a minimum threshold price alleviates the problem of free-loaders, and the PWYW pricing method can be used profitably in the long run.

Keywords: pay-what-you-want; PWYW; pricing; price discrimination; willingness to pay; price discovery mechanism.

DOI: 10.1504/IJSOM.2019.099476

International Journal of Services and Operations Management, 2019 Vol.32 No.4, pp.431 - 449

Available online: 24 Apr 2019 *

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