MULTI-TIER PAY WHAT YOU WANT: COMBINING ENDOGENOUS AND SECOND-DEGREE PRICE DISCRIMINATION
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In the last decade, several sellers have experimented with participative pricing, i.e., pricing mechanisms in which the buyers directly influence the price of a transaction. Pay What You Want (PWYW) is the most rigorous participative pricing model. The buyer can set any price, including zero, and the seller cannot refuse to serve the buyer for that price (Kim, Natter, & Spann, 2009). For the seller, PWYW can be advantageous if the buyers pay differentiated prices that are higher than posted prices. However, the profitability of the pricing model is limited to specific situations (Gerpott, 2017). We introduce a modification of PWYW labeled Multi-Tier Pay What You Want (MTPWYW). In MTPWYW, the seller offers different quality levels of a good. The lower-quality version is available under pure PWYW conditions. The higher-quality versions are only available to customers who pay at least a predefined threshold price. Nonetheless, customers can still pay more than the threshold price for the higher-quality good. Therefore, MTPWYW allows the seller to exclude customers who pay low prices for the higher-quality good. We run a field experiment comparing MTPWYW to PWYW by setting up a waffle stand with two quality levels: the basic version consisted of plain waffles only, the higher-quality version included waffles with toppings. In the case of PWYW, the buyers could choose any price they wanted to for both quality levels. In the case of MTPWYW, waffles with toppings were only available after paying at least the threshold price. The results indicate that MTPWYW can be more profitable than PWYW and that it can achieve two forms of price discrimination: endogenous price discrimination and second-degree price discrimination (i.e., self-selection into different quality levels).