Optimal Price/Advertising Menus for Two-Sided Media Platforms

Abstract

We consider ad-supported media platforms with incomplete information about the disutility consumers experience from exposure to advertising. We characterize the platform's optimal menu of subscription prices and advertising quantities in monopoly and competitive settings, revealing insights on key factors influencing market outcomes. In particular, we show that incomplete information on advertising disutility decreases the optimal subscription price for consumers with low advertising disutility while also decreasing the optimal advertising quantity for consumers with high advertising disutility, suggestive of the ``free use with ads" or ``paid use without ads" menu pricing observed in media streaming markets. We also demonstrate that competition improves prices more for high disutility consumers than low disutility consumers, and in some settings competition may decrease prices for high types, while increasing prices for low types. Further, we characterize the value of offering a menu of differentiated prices to the consumer, relative to offering a single price, and show that competition can make this value higher, suggesting that platforms may have more incentive to adopt menu pricing in competitive markets. We establish these results using a Lagrangian dual approach, allowing us to systematically analyze a multiplicity of constraints in the platform's optimization problem arising from the consumer's endogenous homing decision.

Keywords: media platforms, pricing, menus, advertising, mechanism design