Price is defined as the quantity of payment or compensation given by one party to another in return for goods or services. Every day we observe price of commodities that we purchase, however, very little do we concern about how prices affect our decision.
In the first paper called "Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving" by Ayelet Gneezy et al. (2010) in
Science, the authors provide an insight into price from a producer's viewpoint. Nowadays companies realize the importance of corporate social responsibility (CSR). They understand that apart from making profit, they need to be conscious of consumers' demand for companies' contributions toward society. However, CSR-related cost is often higher than their benefits. In this paper, the authors proposed a new practice of CSR called "Shared Social Responsibility" which utilizes pay-what-you-want (Consumer can choose how much they want to pay) pricing strategy to engage the social preferences of companies and their customers. The new strategy was tested in a field experiment at a riding attraction with more than hundred thousand participants. The price of the product was manipulated by two factors, pricing (either fixed price or PWYW) and existence of charity (either no charity giving or 50% of the money given to charity) resulted in four (2x2) treatments. The results clearly indicate that under PWYW and charity treatment, profit was maximized even after deducting the amount of charity.
Figure 1 Green graphs show the post-cost revenue per rider under pay what you want and charity treatment.
The second paper which represents price from a consumers' viewpoint is called "Price-Sensitive Preferences", a working paper by Mazar N., Koszegi B., and Ariely D.(2010). This paper challenges the neoclassical assumption that reservation price of a consumer, the amount an individual is willing to pay, is independent of prices he encounters in the market. A series of experiments was conducted using commonly purchased products and manipulating sets of offer to create a left-skewed price distribution (most of the prices faced in the market were relatively low) and a right-skewed price distribution (most of the prices faced in the market were relatively high). BDM procedure was also used to extract a person's preference or willingness to pay. From the result of the experiments, it could be observed that participants under left-skewed price distribution were more likely to quote relatively low reservation price whereas participants under right-skewed price distribution did the opposite. It can be implied that a consumer's reservation price is sensitive to prices faced in the market. Moreover, further experiments clarified that this dependency on price distribution was due to a mistake in expressing actual context-independent preference.
In my opinion these two papers have provided highly surprising and intriguing findings and implications yet relatively easy to comprehend. I think that the development of economic experiments both in a field and laboratory setting will eventually lead to an alternative model that can accurately illustrate the market mechanism.
(Written by Boonyada)
