Pay-What-You-Want (PWYW) pricing is a recent participative pricing strategy where a seller offers a good or service for any price consumers want to pay, including zero or some minimum payment. This paper provides a theoretical framework to study strategic effects of the PWYW pricing under duopoly by incorporating behavioral considerations of consumers in making voluntary payments when they could be freeloaders. Without identifying any particular behavioral factor, we assume that consumers feel a sense of guilt when they pay less than their reference points. It is shown that the PWYW pricing can be a profitable marketing strategy than the conventional uniform pricing to differentiate the PWYW firm’s product from its competitor’s product. Most importantly, we show a rather surprising result that the PWYW pricing not only can be more profitable than charging a uniform price, but also can increase profits of both firms by softening price competition between them. We further identify conditions for the equilibrium when one firm chooses PWYW pricing while the other charges a uniform price. In general, PWYW pricing will be observed more often when consumers feel guiltier when paying less, and when the marginal cost of the product is low.