The Price System: Can You “Pay What You Want?”

Apr 2, 2013 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Innovation, Thinking Economically • 156 Views    No Comments

In selected cities, Panera Bread is letting you decide what to pay for a bowl of turkey chili. Knowing that that the firm will cover its costs and the rest will go to charity, many people are paying more than the $5.89 suggested amount.

In 2007, the band Radiohead experimented with Pay What You Want (PWYW). For their album, “In Rainbows,” they simply said online, any amount is okay. The aggregate result was hundreds of thousands of dollars in revenue.

I wondered what was going on and checked an academic study that took me to several behavioral variables. The first was self-image. Faced with a payment option that depends solely on our conscience, we “self-signal.” The money we choose to spend reflects the “good person” we feel we should be.

However, researchers also uncovered an unexpected consequence. Self-signaling can result in fewer purchases. If the amount that retains our self-image is more than we want to spend, we simply say, “No, we won’t buy it.” We might believe we should pay $20 for that bowl of chili. But we don’t want to pay $20. Rather than diminishing our self-image, we walk away with nothing.

A bit uneasy about PWYW, I became concerned about the price system and profits.

Price System:

  • In a market, prices convey information. Responding to demand and supply, prices create incentives for buyers and sellers. With PWYW, the incentives are distorted.

Profits:

  • As for profits, I hope you will watch this Amanda Palmer TED talk and then read this Milton Friedman article. A musician, Palmer explains why PWYW is really about the trust that dominates her business model. At the other extreme is Milton Friedman saying, “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Do you agree with Palmer or Friedman and where does Panera fit?

Sources and Resources:  Here and here are articles on the Panera PWYW initiative and here is the academic study that provides further insight.

 

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