The problem with dilbertrocks's idea that this specific model is guilt-driven (therefore that it works well for in-person transactions, but not so much online, where you ALWAYS have change) is debunked by many online experiments (Radiohead being one of them). You don't give $20 because of the guilt-cost of getting change for your $20, becaue online, you can just as easily give $9,42 than $20, and people STILL overpay.
I put forward the idea that people who WANT to pay, want to do so to SUPPORT the artist, not just to get the plastic thingamajig in return. This is why people WILL pay for intangible goods online, if only to get that warm, fuzzy, helper-of-the-arts feeling.
Name-your-own-price therefore also puts a "how-much-do-you-love-me" premium on the goods themselves, whether physical or digital. The same thing happens in sports: someone who loves Ferrari will pay indecent amounts of money for a Ferrari polo / baseball hat, because it shows their affection for the brand, and their support for the company (and, presumably, their sporting endeavours). They're basically saying "We know a polo is worth $15, but we're ready to pay ten times that amount because we love you".
(Has anyone explored the idea of comparing the music-trinkets business with any other derivatives-based market, like sports?)
I think it works out because people WANT to buy, because they want to SUPPORT the artist.
Psychologically, when you want to help someone out, you balance your cost with the reward to the other person. (This is why you won't jump in a huge waterfall to try and save someone from drowning if you risk killing yourself, but you will jump in a pool if it means you'll perhaps ruin your clothes but saving someone's life.)
Also, we've been trained to think CDs are a certain price (between $10 and $15, mostly).
If I really want to help someone, I'll try to gauge what I can afford to give, while keeping in mind what the item is worth. If I can only afford giving $2 but I'm getting a CD in return, I'll probably pass, because I'd feel bad about getting a $2 CD. On the other hand, if I have $20 and I really, really like what the guy is doing, then, sure, because I'm not just paying for the CD, I'm paying to help the guy out and have him make more music.
He's not just giving RtB, he's also playing the "support the artist" vein, so he's in fact selling merch AND getting a tip. "Name your own price" means "You KNOW how much a CD is worth. You're welcome to give me more, though."