EARLY in the study of economics, students are introduced to Homo economicus, a

rough caricature of a human being with an eye to extracting the maximum personal
advantage from any given situation. In the real world, of course, human behaviour
is much more complicated than that. One example is a pricing strategy called pay
what you want, in which customers are allowed to choose any priceeven zero
for a good. Despite the obvious benefit of getting something for nothing, many
people nevertheless choose to pay. The model hit the news in 2007 when
Radiohead, a British band, released their album In Rainbows on the internet with
just such a pricing arrangement.
A team of researchers led by Ayelet Gneezy at the University of California's Rady
School of Management has now published a paper in the Proceedings of the
National Academy of Sciences that makes some suggestions about the
psychological underpinnings of this generosity. They finger the egoin particular, a
desire to think of yourself as a good person. And they find that allowing people to
name their own price may result in fewer sales than the old-fashioned approach of
simply setting a single price for everybody.
The researchers ran three experiments. The first involved more than 53,000
customers of a theme park, who were photographed while riding a rollercoaster. In
one iteration of the experiment, customers were offered the chance to buy the
photo for a price of their own choosing. In the second run, they were offered the
same deal, except that half their suggested price would be donated to a children's
charity.
The researchers noted two big effects. The average price suggested by those in the
group benefiting the charity was over five times as high as that suggested by the
first group. At the same time, only half as many people in the second group wanted
to buy a photo. The researchers argue that the two results are linked: because the
right price for the charity-and-photo combination was felt to be so much higher, a
significant number of people preferred not to buy at all than to damage their selfimage by offering a miserly price, and, by extension, a tight-fisted donation to a
deserving cause.
The second experiment confirmed the first. Passengers on a boat trip were
photographed and then offered the chance to buy the photos. This time Dr Gneezy
and his colleagues controlled their subjects' expectations more directly. For one
group, the price was set at $15, for another it was $5, and the third were allowed to
name their own price. All three groups were told that the normal price was $15. As
expected, demand for photos rose when the price dropped from $15 to $5. But it fell
again when people could pick their price. Again the researchers suggest that an
overly low price can feel unpleasantly parsimonious. In contrast, when the
company sets the price at $5, there is no ambiguity about fairness, self-image
concerns disappear and people are happy to pay.
To determine whether it is your conscience that prods you to be generous, as
opposed to pressure from your peers, the third experiment took place in a
restaurant in which customers chose the price paid for a meal. One group was
allowed to pay secretly; another paid in public. The people allowed to pay their bills
anonymously chose to pay more, on average, than those who paid in public.
Radiohead, for their part, seem to have anticipated Dr Gneezy's conclusions. Their
latest album, The King of Limbs, was again released onlinebut only for a fixed
price, of $9.