Freemium Competition Among Ad-Sponsored Platforms
44 Pages Posted: 12 May 2016 Last revised: 5 Dec 2019
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: Suggested Citation