“Pay what you want” as threshold public good provision
Introduction
In a recent post on the Wikimedia Foundation website, Jimmy Wales, co-founder of Wikipedia, pleaded with users to donate to the website so that Wikipedia would not have to raise revenues through advertising. He wrote: “Commerce is fine. Advertising is not evil. But it doesn’t belong here. Not in Wikipedia.”1 Wales has repeatedly made similar pleas to users for years, so as to assure that the website is financially sustained by users’ donations. In effect, Wikipedia has survived by means of a “pay what you want” (PWYW) pricing policy, under which every user donates any amount they want (including nothing) for Wikipedia’s products. Wales’ message underscores the argument that user donations help “keep Wikipedia free”. Sufficient donations would sustain Wikipedia’s PWYW model in the future, but if donations did not reach sufficiency, Wikipedia might have to charge users a subscription fee that would potentially be higher than the donation solicited; or Wikipedia might have to accept advertisements, an action that could reduce users’ future benefits because Wikipedia’s pursuit of advertising revenue might adversely impact their real or perceived objectivity. This argument, apparently, has persuaded many users to pay Wikipedia, despite the fact that they could have paid nothing while consuming the website’s content. In fact, the website has essentially become a public good with associated free riding issues, as the PWYW policy makes the website’s content available to all users for free, and excludes no user.
The prevailing wisdom in the literature on PWYW focuses on how consumers’ sense of altruism or of fairness towards the seller might influence their payments (e.g., Gneezy, Gneezy, Nelson, & Brown, 2010). We offer a different perspective by demonstrating that PWYW can transform a private good (e.g., the content of Wikipedia) into a public good by effectively making it non-excludable and non-rivalrous. If (1) there are repeated interactions between the seller (e.g., the Wikimedia Foundation) and its customers (users of Wikipedia), and (2) future provision of PWYW depends on whether current revenue under PWYW is sufficiently large for the seller to achieve financial goals, then consumers paying under PWYW can be likened to paying for the future provision of a threshold or step-level public good (see e.g., Croson and Marks, 2000, van der Kragt et al., 1983). The Wikipedia example highlights this perspective, which underpins the core thesis of our paper. By means of a simple model, we show that, theoretically, continuous provision of PWYW could be profitable to the seller even when all consumers are purely self-interested. This theoretical implication therefore augments the extant literature on PWYW, which has primarily focused on fairness or altruistic motives towards the seller. Our experiments provide further empirical evidence for the theoretical implication.
Like most other threshold public good models, our model allows for two types of equilibrium outcomes: a socially inferior outcome in which no consumer pays, and a set of socially efficient outcomes in which consumers coordinate tacitly to attain a high level of PWYW (the “public good”) provision. As such, it has the characteristics of a social dilemma in a general sense (Van Lange, Joireman, Parks, & Van Dijk, 2013). A major objective of our study is to identify behavioral conditions that can sustain tacit coordination in the social dilemma manifested in our model. We found one such condition in our Experiment 1: if there is online chat-room-style communication among consumers prior to paying, then tacit coordination at the payment stage can be accomplished to achieve continuous provision of PWYW. Such long-term provision of PWYW is generally an efficient outcome for the seller and for consumers. That is, cooperative equilibria in our PWYW situations can be sustained through communication. It needs be emphasized that, as the chat log of our experimental subjects indicate, those equilibria were sustained in the absence of fairness or altruistic motives towards the seller (cf. the Thick description in that experiment’s Analysis and Results section).
In addition, our experimental results suggest that communication facilitates coordination by fostering social influence among players, so that they could collectively agree on and socially “contract” themselves to commit to actions that would improve efficiency (Kerr and Kaufman-Gilliland, 1994, van der Kragt et al., 1983). The mechanism can be understood as one by which norms of “appropriate” behavior that enhance efficiency became established among players via communication (see Weber, Kopelman, & Messick, 2004).
We conducted Experiment 2 to understand whether communication remains effective in sustaining PWYW when consumers have limited feedback about each other’s payments, or limited information about the market. The experiment was motivated by the fact that, in many real-life PWYW examples, consumers are not informed about each other’s specific payments to the seller; oftentimes, the most information that they can obtain is information about total payment. Similarly, consumers often have little information about the distribution of valuations among other consumers in the market. Therefore, we experimentally examined the extent to which communication might or might not be able to facilitate coordination when: (a) consumers receive feedback only about total payment under PWYW but no feedback about each other’s specific payments; and (b) consumers lack “market information” pertaining to the distribution of valuations among other consumers. Our findings are supportive. Even when players received only partial feedback or no market information, communication could sustain continued provision of PWYW.
Our study is relevant to numerous real-life settings. For instance, several online platforms for independent artists (e.g., Bandcamp, NoiseTrade, Jamendo, Magnatune, and Kroogi) allow their artists to determine their pricing format (fixed price versus PWYW). These platforms bridge the gap between free (and often illegal) and fixed price models by letting fans determine the value of the content and pay an appropriate price. The fact that these PWYW sellers thrive on online consumer communication – such as chat forums – is consistent with one of our major experimental findings, namely that communication is key to socially efficient coordination that sustains long-term PWYW. Further, it has been suggested in the popular press that artists should switch from an initial PWYW model to fixed pricing if the PWYW pricing does not yield desired financial results (Geere, 2010).2 This prescription is consistent with a feature of our model, according to which, if PWYW does not generate sufficient revenues to satisfy the seller’s financial goals, then the seller would resort to fixed pricing.
In more general terms, our research is germane to organizations or individuals who offer products or services to buyers and would prefer to not employ conventional fixed prices for their products and services. We develop, through a simple, stylized model and two experiments based on the model, insights into how such a seller might profitably survive while offering consumers PWYW without relying on consumers’ sense of fairness or altruism towards the seller. We also contribute to research in social dilemmas by revealing a possible link between donation-based business models and social dilemmas. Lastly, through our experiments, we highlight how communication could facilitate the establishment of norms of “appropriate” behavior and high efficiency in social dilemmas, even when players have limited feedback about each other’s payments, or limited information about the distribution of valuations among themselves. As such, we contribute to research on “cheap talk” communication that pertains to previous studies in social psychology and economics.
Section snippets
Pay what you want
While the pricing literature is voluminous, the literature that speaks to PWYW pricing is relatively sparse, and the possibility that PWYW may transform a private good into a public good has not been systematically investigated. A dominant stream of studies in the PWYW literature examines the social psychological determinants of payments in one-off PWYW settings; a major finding is that consumers’ payments under PWYW depend largely on their social preferences, in particular altruism, concerns
A model of continuous PWYW provision
In this section, we present a simple model to generate our core insights. We shall then use a version of this model to set up our experiment. The model consists of the following features:
- (1)
There is a seller, S, and a population of N consumers. There are infinitely or indefinitely repeated interactions (selling opportunities) between the seller and consumers. Each interaction is denoted as a period. The seller sells its products with negligible marginal cost. For example, the products can be
Experiment 1
As discussed in the previous section, our model exhibits a social dilemma with the character of threshold public good provision. A major objective of Experiment 1 is to identify behavioral conditions that can sustain tacit coordination in that social dilemma. Specifically, our experiment was designed to investigate whether and how PWYW equilibria can be attained in a laboratory environment that simulates our model.
A fundamental feature of our experimental setup was that we simulated the focal
Experiment 2
Experiment 1 established that online chat-room-style communication prior to paying could facilitate tacit coordination at the payment stage to sustain efficient provision of PWYW. It should be noted, however, that subjects in Experiment 1 were provided a breakdown of payments from all subjects after every round in the experiment. Previous payments could have been perceived by players as normative signals of “appropriate” behavior (see Weber & Murnighan, 2008). Such information could be a
Discussion and conclusions
In this paper, we offer a perspective on PWYW that augments the literature on this pricing policy. We demonstrate that, if the seller and consumers interact repeatedly, and future provision of PWYW depends on whether current revenue under PWYW is sufficiently large for the seller to achieve financial goals, then paying under PWYW can be likened to paying for a threshold public good. An implication, which we demonstrate through analyzing a simple model, is that continuous provision of the PWYW
Acknowledgments
The authors would like to thank the Associate Editor and two reviewers for insightful comments and suggestions that have improved the paper. The authors would also like to acknowledge the comments of Marco Bertini, Tony Cui, Jan Heide, George John, Christoph Loch, Amnon Rapoport, Martin Spann, as well as seminar participants at the University of California, Riverside, University of California, San Diego, University of Cambridge, University of Illinois at Urbana- Champaign, and University of
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