As I’m sure you’ve heard by now, Radiohead have decided to give away their new album online in exchange for a voluntary donation. When one buys the album you choose how much you want to pay for it, with no lower or upper limit on how much you can pay. the idea of paying for something that you can get for free is one that’s puzzled economists for some time. The classic experiment in the field is the Dictator game. In this game one person has an endowment of money and they choose how to split it between them and another person. Despite having no pressure to do so, many people give money to the other person in the experiment. There have been a truckload of different experimental designs employed to investigate this phenomenon.
The key difficulty is that people have the opportunity to donate money to strangers in everyday life but few tend to. Why is it that they then give money away when faced with this experiment? Most explanations focus on the contrived nature of the situation: with a researcher standing there observing your donation one worries about being thought of as selfish if one keeps all the money. Indeed, a large scale anonymous experiment with no researcher present showed very little evidence of altruistic donations.
So what’s my pick for the Radiohead sales? Well, the donation is unobserved and anonymous so the evidence suggests that casual listeners are unlikely to pay for it. However, publicising how much you donated for the album could be a credible signal of your dedication to the band. I’d expect fans of the band to give fairly generously and make their donation known to others. I see also that to get the album you have to enter your credit card details, however much you intend to pay. This seems like a good way of reducing the marginal transaction costs of giving: if you have to enter your details anyway then it’s easy to give a couple of dollars at the same time.