Tuesday, January 30, 2018
Yong Chao, University of Louisville - College of Business - Department of Economics, Jose M. Fernandez, University of Louisville - Department of Economics; University of Louisville - College of Business and Public Administration, and Babu Nahata, University of Louisville - College of Business - Department of Economics analyze Pay-What-You-Want Pricing Under Competition: Breaking the Bertrand Trap.
ABSTRACT: This paper investigates the viability of Pay-What-You-Want (PWYW) pricing when firms compete without restrictions of a minimum payment requirement. We show that the equilibrium outcomes are different when underpayers, consumers paying less than marginal cost, are present as opposed to when they are absent. In particular, when PWYW pricing is practiced without restricting the presence of underpayers or any minimum payment requirement, then the only two equilibrium structures are: either both firms use the posted price and earn zero profits, or one firm adopts PWYW pricing and the other uses the posted price. The asymmetric pricing equilibrium leads to a softening of price competition where both firms earn positive profits and the Bertrand Trap is broken.