Pay-What-You-Want Pricing in the Digital Product Marketplace: A Feasible Alternative to Piracy Prevention?

Abstract

Pay-what-you-want (PWYW) pricing is a pricing scheme under which buyers pay any amount for a product, often including zero. Digital product firms may particularly benefit from PWYW pricing because it can be utilized as an alternative to their costly piracy prevention efforts. In this paper, we examine PWYW pricing based on the established social preference theory where consumers may be concerned with how fairly they are being treated by firms. Utilizing a two-segment model for consumers (self-interested versus fair minded), we study PWYW pricing against traditional, posted pricing in a monopolistic digital product market. We show that under posted pricing, it is optimal to eliminate piracy when the quality development cost is sufficiently high. Interestingly, high quality of the illegal copy associated with low quality development cost makes PWYW pricing an effective alternative to posted pricing. We also examine the impact of network externalities on PWYW pricing. Counterintuitively, despite the full market penetration, PWYW pricing invariably becomes less profitable than posted pricing as network externalities become sufficiently strong. Our findings explain why PWYW pricing is rare in the established digital product marketplace with strong network externalities despite near-zero marginal costs.