Optimal Price/Advertising Menus for Two-Sided Media Platforms

Abstract

Ad-supported media platforms often engage price-sensitive consumers by offering content for free while reaping revenue from advertisers. Many consumers are also sensitive to advertising, however, so platforms need to carefully balance their advertising quantities with the prices they offer to consumers. Several platforms use menu pricing to achieve this goal: they offer consumers a choice between a free-use/ad-supported option or a paid-use/no-ad option. In “Optimal Price/Advertising Menus for Two-Sided Media Platforms,” DeValve and Pekeč use Lagrangian duality to establish the optimality of such menus in a model of consumers with heterogeneous advertising sensitivity, offering both theoretical justification for their use in practice as well as guidance on when and how to set positive prices. Moreover, the optimal menu characterization implies that platforms may have more of an incentive to offer menu pricing under competition (further explaining their prevalence in the competitive digital media market) and platforms primarily cater to consumers with low advertising sensitivity (suggestive of the proliferation of online advertising observed in practice).