This research aims to investigate the effectiveness of the adoption of external reference price (ERP) in influencing consumers’ pay-what-you-want (PWYW) final payments across different product types. Results from two experiments show the effectiveness of using ERP as an anchor heavily depends on the nature of the product category. For hedonic products, the absence of an ERP, compared to the presence of one, leads to higher perceived quality and PWYW payments. The results are the opposite for utilitarian products. This study contributes to PWYW literature by investigating how product types affect consumers’ perceived quality of the product offered and their PWYW payments.

Introduction

Participative pricing mechanisms (e.g., auctions and name your own price) allow consumers to participate in determining the final price paid for goods or services and are becoming more common with the increased popularity of Internet shopping. The pay-what-you-want (PWYW) pricing strategy is the most extreme form of participative pricing that offers consumers the greatest control over prices, as it allows them to set the price at any level, including zero, and the seller cannot reject it (Kim et al., 2009). Examples from the service industry demonstrate the potential applications of the PWYW pricing mechanism, such as restaurants, museums, hotels, and zoos, etc. (Schons et al., 2014). In addition to the industry examples from brick-andmortar stores, PWYW is also popular in the online business environment. For example, Humble Bundle offers bundles of indie digital games to consumers in a PWYW pricing setting, where the average payment for its games is slightly over $9 (Coldewey, 2017). The music industry also applies this strategy to sell music albums at prices that consumers prefer (Isaac et al., 2015; Regner and Barria, 2009). Software developer AdBlock releases software on a PWYW basis while the agency 8 K is the first interactive agency to design logos and slogans for clients using a PWYW payment system. In addition, there are multiple online training courses on computer programming or Microsoft Office being offered as a PWYW format (PC World, 2017). External reference price (ERP) has been studied extensively, but no consistent conclusion has yet been reached regarding how the use of ERP affects PWYW payment amounts. Prior research suggests that using ERP can enhance consumers’ final PWYW payments (Kim et al., 2014).