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- Title
Pay-What-You-Want Pricing in the Digital Product Marketplace: A Feasible Alternative to Piracy Prevention?
- Authors
Kim, Byung Cho; Park, So Eun; Straub, Detmar W.
- Abstract
In pay-what-you-want (PWYW) pricing, buyers are allowed to pay any amount they want, often including a price of zero. Standard theory predicts that buyers are driven solely by their own interest and will always choose to pay nothing, making PWYW pricing impractical to use. Nonetheless, PWYW pricing has been consistently occurring in the marketplace. We build and analyze a theoretical model to explain the presence of PWYW pricing in the marketplace and identify the situations under which businesses are better off adopting it over the traditional posted pricing. Because the digital product domain is a particularly good fit for PWYW pricing because of its constant exposure to piracy threats, we focus on digital product firms and examine PWYW pricing as an alternative to their piracy prevention efforts. We show that PWYW pricing becomes a superior pricing strategy when the pirate version is quite similar to the authentic product and it is costly for the firm to improve its product quality. Moreover, if network externalities are present, PWYW pricing can outperform posted pricing only when the network externalities are weak. The results explain why PWYW pricing is rare in the established digital product marketplace, which exhibits strong network externalities. 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.
- Subjects
INTERNET piracy; DIGITAL media; PRICES; MARKETPLACES; DIGITAL rights management; MARKET penetration
- Publication
Information Systems Research, 2022, Vol 33, Issue 3, p784
- ISSN
1047-7047
- Publication type
Article
- DOI
10.1287/isre.2021.1094