Panera Bakery has opened a non-profit pay-what-you-want shop in an upscale St. Louis suburb. This is surely a form of (voluntary) price discrimination, where everyone pays an amount that reflects the value to them of the marginal croissant or sandwich.
It almost certainly erodes both consumer and producer surplus, economists' measure of welfare obtained from competitive markets. If consumers consistently "cheat" in the amount they pay, it could be output reducing (assuming an upwardly sloping supply curve) or could alter the output mix.
In an ideal world, the value of the lost consumer surplus would exactly balance the lost producer surplus for the units provided at below marginal cost "prices." In other words, the amount paid by those who value the product more at the margin will in effect be transferred to those who value the product less at the margin (at least as revealed by the price they pay). In this case, level and mix of output should be the same as in a competitive market (I think).
I can think of several reasons why someone might offer a low price: 1) they can't afford to pay more, but would benefit nutritionally and psychologically by more than or at least as much as the price they can afford to offer; 2) they can afford more, but do not value the sandwich enough to pay a higher price; or 3) they can afford to pay more, their valuation of the sandwich is high (say above marginal cost), but they prefer to cheat and pay less than their actual valuation of the sandwich.
Assuming the store can stay in business without altering product mix or output, will there be a welfare loss or a welfare gain? How will the mix of 1's, 2's, and 3's affect your answer? How might social norms or an inner moral compass affect the outcome of this experiment? Is there any way to "police" cheaters while maintaining the spirit of the experiment? Under what conditions is this pricing mechanism Pareto efficient?
You won't be graded.
i dont know how this will work in the panera situation, but a number of farmers is my neighborhood do this annually with their roadside produce stands, and it seems to work well; there is a cashbox for those who stop for produce to pay what they want; the obvious advantage to the grower is that there is no need to have someone tend the stand
Posted by: rjs | 05/21/2010 at 06:20 AM
I think it would be time dependent.
I believe the novelty of the model itself would encourage some people to pay more upon their first visit.
Subsequent visits might lose the novelty value, and it might even continue to erode to the point of abuse.
There would have to be a system to prevent abuse. Pehaps there could be a 50% chance of getting a nasty electrical shock if abusive payment is tendered.
Posted by: K Ackermann | 05/22/2010 at 06:59 PM
The outcome would depend on the social constructs of the customers (most likely in a US city there would be several constructs, so the outcome will be unclear).
When I was knocking around Asia in the 70s I encountered several different bargaining systems. In rural Indonesia, price for many items (not all) reflected status - the higher you were, the more you paid. To pay less was to devalue one's status.
In India, the first price mentioned was a signal of the actual price expected - plus or minus about 10%. Too low or too high signalled lack of interest.
In Afghanistan, prices asked seemed to reflect judgements about the amount of force one could potentially bring to bear (I did not argue too much).
Some of the same applies in car boot sales here in Australia - some people are embarrassed to ask too much, or to pay too little.
What makes anyone think prices are directly related to utility?
Posted by: Peter T | 05/26/2010 at 07:29 AM