Default Effects Under Pay-What-You-Want: Evidence from the Field

Pay-what-you-want pricing is a flexible pricing system which allows consumers to pay any price they want, typically including very small amounts or even $0. A classically selfish consumer might be expected to pay the lowest price possible, exploiting the opportunity to acquire goods or services for free. However, real-world examples of online companies adopting pay-what-you-want indicate that people frequently choose to pay more than the minimum. In fact, we observe that customers are heavily influenced by suggestions offered (implicitly or explicitly) by the company. In this research, we investigate the power of these suggestions in the forms of reference prices and defaults under pay-what-you-want with a new level of precision. Reference prices can be powerful in the context of pay-what-you-want. Some references can be implicit, such as when a company donates some of their profits to charity (Gneezy, Gneezy, Brown, & Nelson, 2010). Other references can be explicit prices: for example, when customers learn about the average price paid by others, that information eliminates the otherwise significant influence of anonymity (Gneezy, Gneezy, Reiner, & Nelson 2012). Such a reference price may contain information about what is “fair”, “appropriate”, or simply “common”. A plausible consumer approach might be to find such a reasonable cue and adjust (down) to a preferred amount. The weakest type of reference price is in the provision of a simple default. Research on default effects in various contexts suggests that a majority of people follow the default choices set by companies (Madrian & Shea, 2001; Thaler & Bernartzi, 2004; Johnson et al., 1993). By studying reference prices in the maximally flexible environment of pay-what-you-want, and by doing so through collaborating with three online companies, we can investigate the influence of reference price with precision.