# Pay What You Want Pricing; Micro Foundations

One of those things that makes intuitive sense to me, but not economic sense is the "pay what you want" (PWYW) scheme of pricing. When thinking of traditional micro theory, the effective price of a good under classical PWYW is zero, which creates infinite demand for the good and no equilibria. Yet in real life, consumers willingly pay a positive amount of money for these goods. I understand PYWY can eliminate some of the problems with adverse selection and it is used for market penetration, but I don't have any foundational idea for why this is the case or how you would model consumers in this pay scheme.

(I am aware of the existence of this question, but I feel like mine is different enough to warrant a separate one.)

• This is a very interesting topic, but what is your question? Reference request for an appropriate micro model? Dec 20 '15 at 10:21
• References work, or any suggestions at your own setup for modelling this kind of behavior. I have no idea if the fundamentals are very easy to set up for this kind of model and if it could just be answered as a few equations. Dec 20 '15 at 17:33

It seems that some consumers get utility from paying for the good. This isn't always true, and it does seem counter-intuitive at times. In fact, it often seems that consumers get utility from getting a "great deal," and we often hear them brag about their amazing feats of 80% off. In this case, however, for a few different reasons, some consumers get utility for paying. It is the responsibility of the seller to try to maximize or enhance the utility for paying in order to increase revenue. They have a few tools to do this, including making a big deal about how some of their proceeds may go to charity and by thanking "viewers like you" who choose to pay more than $0 for the good in question, and whose contributions allow the producer to continue operating. They may also provide Internet Points in much the same way that that Stack Exchange and other sites do in order to help incentivize suppliers to provide quality content in exchange for zero dollars. They can also be thought of as providing disutility, using some of the same tools, to those who don't pay. And, as you mentioned, sellers often go with a PWYW scheme to improve market penetration, and this is often stressed. Sellers who need market penetration can typically pass as "indie," and flaunting their indieness may again improve the utility the consumers get by choosing to "support" them, the "little guy" or underdog. This brings to mind a couple of economic papers (which I can't seem to find at the moment) relating to horseracing and how it seems that people get utility from betting on the underdog to the point where it was once possible to have a positive expected value for betting on the favorite whenever the odds were above somewhere around 1:1 or 1:2. Anyway, marketplaces for these goods tend to strongly emphasize this, doing whatever they can to promote their sellers as home-grown upstart startups, even putting it in their respective names, encouraging consumers who pay to think of themselves as supporters or patrons rather than consumers or even foolish rubes who paid for something that they could have gotten for the sum or$0.

To summarize, I think that those who choose to pay are actually purchasing the good in a bundle: the item being sold, along with some quantity of warm fuzzies. At a certain point, consumers either get no additional fuzzies or start getting anti-fuzzies (cold stabbies? Ice bricks?) for paying any more. Some consumers get no fuzzies for paying, or their willingness to pay for fuzzies is low, so they pay zero dollars. Sellers know this, so they are responsible for maximizing the quantity of fuzzies (perhaps by influencing consumers) and gaging how many consumers they can expect to get fuzzies before deciding to use PWYW. It's possible that the quality of the good being sold is related to the quantity of fuzzies that the buyer receives. That is to say, consumers may enjoy paying parties who make "good" goods, and they will likely feel ripped off if they voluntarily pay for a "lemon."

• This broad and insightful answer could be improved by some definitions - e.g. by "warm fuzzies" do you mean "warm glow" which is a concept usedto explain altruism? - and references. You described several consumer behavior patterns. Which of these is established by behavioral experiments and which is conjecture or merely a reasonable model? Dec 20 '15 at 10:26
• @denesp I would say that it is mostly conjecture and speculation. I will think about this and try to improve my answer at some point. I do think that the "warm glow" describes some of what is happening.
– JTL
Dec 20 '15 at 23:21

I see two possibilities here:

1. Consumers are paying for the possibility to have the product available in the future. They now that paying zero will lead the producer to be bankrupt, but paying what they want will make them buy a product at surplus (price
2. Consumers receive a negative social value from stealing, and paying zero = stealing. It is intuitive that most of us does not want to harm others, and when you translate that into a neoclassical model, this would represent a negative utility that outweighs the value of the good. Knowing this, the producer can be confident that the consumers will always pay more than zero. The expected price could be, for instance, the value of the cheapest comparable product, perhaps with a discount of ~20% (this is what I used to pay in PWYW restaurants).