I ended up having a lot of really interesting conversations about the ‘pay whatever you want (including free)’ pricing model for digital goods (usually abbreviated to PWYW) over the past 24 hours as a response to my blog post about why I had selected to make my book Music in the Digital Age available with a free option.

A friend of mine who works as an economist in the private sector sent me his 2005 analysis of the pricing model and has agreed to let me make it available to you here. If you don’t have an economics background (I don’t) then it might be a little heavy going – but the conclusion appears to be that “pay what you think it’s worth” is pretty good for businesses and consumers alike.

Here’s the prĂ©cis:

There are many market structures where it is possible for a firm to produce a quantity consistent with the quantity that would be produced if the firm decided to produce where price is equal to marginal cost (P=MC). However, there are few market structures where it is reasonable to expect a firm to produce at this social optimal level. Firms are motivated by profit maximisation and therefore it is only reasonable to expect them to produce a P=MC quantity when profit maximisation is simultaneously achieved by it. This essay shall examine some market structures where it might be reasonable to expect a P=MC quantity and then consider the impact of each of these on consumer welfare, considering specifically perfect competition, some monopoly models and the Bertrand oligopoly model.

And here’s the PDF of his essay.