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Title: Name-Your-Own-Price: On Fairness in Markets

Abstract:

It is hard to find clean evidence of fair behavior in markets, because observed behavior is open to many other interpretations, such as ulterior motive and reputation concerns. A unique data set comes from the "name-your-own-price" release of Radiohead's album in October 2006. Free from price-tag or from sanctions, hundreds of thousands of fans chose to pay, sometimes more than the cost of a regular CD for downloading the album. It is impossible, however, to know whether Radiohead lost or gained money using this strategy, because we do not know the counterfactual.

We use a field study to investigate the profitability of such a pricing scheme in a more controlled environment. Passengers on a day-cruise ship are photographed before boarding. Upon returning to shore, passengers walk near a board where all printed pictures are presented, and are offered to buy their picture for $15. We compare this common conduct with a manipulation in which the passengers are asked to name their own price for the picture.

As expected, significantly more passengers took their picture under the new pricing scheme. While most people pay less than the regular $15 per picture, the increase in volume offset this lose, and profits are similar under both schemes. Importantly, moving to the name-your-own-price scheme resulted in important gains of brand equity; the passengers view the brand more favorably and were more likely to recommend it to others in the future.

These combined results present strong evidence for fairness in markets. People are willing to pay what they perceive as a fair price for a good or service, even when they do not have to.