Watching ad or paying premium

Abstract

In many online services, the firm generates the revenue in two different forms

the advertising revenue by inducing consumers to watch ads and the subscription revenue from the premium consumers who want to avoid wathcing ads. This paper studies the optimal design of such service platforms

the proportion of ad-clips for normal users and the ad-free subscription fee for premium users. To model this, we first consider consumers who are heterogeneous in the valuation on the service and the disutility on watching ads. We, then, incorporate into this consumer model to the firm's optimal design problems, in which the firm maximizes not only the current revenues but also the extra value from the user size. We characterized the optimal ad-free price and the optimal length of ads, and compare with the fee-only firm and the ads-only firm. We found the conditions under which the firm is better off by providing ads and fee simultaneously, and how the fee and the ad length adjust each other.