"Radiohead makes most of its income by touring, so even if they lose money on the album, but get more popular, they can just go on tour. A restaurant has no other way to get that money back."

This is the crucial point. The Radiohead model is not applicable because for them the albums is a publicity machine that feeds into their real business: concerts, memorabilia, etc. Think Google, every free service/tool/platform they offer funnels into their main search business.

I think for big chain restaurants, like Panera, this may make sense. The loss they suffer from 2-3 stores is more than offset by the huge publicity they gain, but they cannot do it widely. For small unknowns it doesn't make sense to do it continuously but they make try it for short periods of time. Similar to how small businesses tolerate Groupon's huge 50% commission.

Doing this as a short (e.g. 2-3 month) experiment also gives you an excellent indicator of the perceived value of your service.

It's also worth examining the cost of the goods being sold. The "cost" of a digital album download is negligible. The cost of producing a meal represents a significant portion of the selling price when you factor in labor.

I like this model a lot but what if it was "pay what you can", not "pay what you want"? While subtle I think this change in the verb drastically changes the game. Not only is it much harder than you’d think to evaluate for yourself what you can pay but it requires a change in how we calculate value and turns payments into a mutual ethical obligation between producers and consumers. It goes well beyond our naive notion of "voting with your wallet".

I was in Berlin not 3 days ago and saw a restaurant that, by all appearances, is flourishing with this business model.

It should be noted that in Berlin, you ride the underground on something of an honor system, and no one j-walks, so the culture clearly supports this kind of business model.

Make it a place where you eat every day, and it will be a failure.

Make it a place where you take your girlfriend on payday, and it will be a total success.

It totally depends on context.

Also: "Radiohead makes most of its income by touring, so even if they lose money on the album, but get more popular, they can just go on tour." is false and misleading.

Radiohead makes money if the average price paid is more than the average bandwidth and hosting price. And hosting is very cheap nowadays.

Very true. And if they choose to use Bittorrent, it becomes even cheaper.