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In online contents markets, content providers collect revenues from both consumers and advertisers by segmenting consumers who are willing to avoid advertisements and who are not. To analyze such situations,… Click to show full abstract
In online contents markets, content providers collect revenues from both consumers and advertisers by segmenting consumers who are willing to avoid advertisements and who are not. To analyze such situations, I construct a model of menu pricing by advertising platforms in two-sided markets. I find that, under certain condition, although a monopolistic platform can choose any menu of price-advertisement pairs, the optimal menu consists of only two services: ad-supported basic service and ad-free premium service. In addition, if the willingness to pay of advertisers is sufficiently high, the basic service is offered for free. This menu pricing is well known as freemium. Furthermore, this binary structure remains to hold under several extensions including duopoly platform competition.
Journal Title: International Journal of Industrial Organization
Year Published: 2019
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