Monetizing Platform Markets: Channel Structure and In-Game Advertiser Presence in Two-Sided Markets *

Abstract

Recent shifts in the video game console industry point to a growing reliance on ad-supported monetization models alongside traditional hardware and software sales. Major platform owners are exploring in-game advertising across consoles, mobile, and cloud environments, while hardware continues to be sold through physical retailers. This emerging configuration raises new strategic questions about how distribution channels and advertiser participation interact. Building on this industry context, this paper examines the strategic interplay between channel structure and the presence of advertisers in a two-sided market where one side consists of users and the other of advertisers. We compare outcomes under two channel structures-a platform selling directly to users or through a downstream retailer-and explore how the introduction of advertisers affects equilibrium outcomes across these structures. Conversely, we investigate how the platform's distribution channel affects equilibrium outcomes depending on whether the advertising side exists. Several interesting results emerge. In a one-sided market without advertisers, introducing a retailer consistently raises the retail price, reduces industry profit, and lowers social welfare due to double marginalization. However, in the presence of advertisers, while the introduction of a retailer still reduces industry profit, it can lower the retail price and increase social welfare. Similarly, when a retailer is already present, adding the advertiser side as a new source of revenue does not necessarily benefit the platform once the retailer's strategic response is accounted for. Our analysis reveals conditions under which advertiser presence and channel structure reinforce or counteract each other, offering new insights into platform design and multi-sided pricing strategies.

Keywords: Two-Sided Platforms, Ad-Supported Monetization, Channel Structure, Vertical Integration