Freemium Competition Among Ad-Sponsored Platforms

44 Pages Posted: 12 May 2016 Last revised: 5 Dec 2019

See all articles by Yusuke Zennyo

Yusuke Zennyo

Graduate School of Business Administration, Kobe University

Date Written: December 4, 2019

Abstract

This paper studies competition between ad-sponsored platforms that strategically determine business models. In addition to basic services including annoying advertisements, each platform decides whether to introduce an ad-free premium service (i.e., a freemium business model). Freemium platforms encounter a trade-off between increasing the number of premium users for the subscription-based revenues and increasing the number of basic users for the ad-sponsored revenues. I characterize how the freemium platforms should segment their users into basic and premium services. Moreover, I show that the equilibrium business model choice depends on the extent of fixed costs for introducing a premium service. When the fixed cost is at an intermediate level, asymmetric equilibria may arise: i.e., only one platform introduces the premium service. Competing platforms may have an incentive to coordinate their choices toward asymmetric market structures; however, these structures can be harmful to both consumers and advertisers.

Keywords: freemium, two-sided markets, indirect network externalities, advertising

JEL Classification: D43, L13, L14

Suggested Citation

Zennyo, Yusuke, Freemium Competition Among Ad-Sponsored Platforms (December 4, 2019). Available at SSRN: https://ssrn.com/abstract=2777918 or http://dx.doi.org/10.2139/ssrn.2777918

Yusuke Zennyo (Contact Author)

Graduate School of Business Administration, Kobe University ( email )

2-1 Rokkodai
Nada
Kobe, Hyogo 657-8501
Japan

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