Two-Sided Price Discrimination by Media Platforms
55 Pages Posted: 10 Nov 2018 Last revised: 21 May 2019
Date Written: May 20, 2019
An increasingly common practice among media platforms is to provide premium content versions with fewer or even no ads. This practice leads to an intriguing question: how should ad-financed media price discriminate through versioning? I develop a two-sided media model and illustrate that price discrimination on one side can strengthen the incentive to discriminate on the other. Under this self-reinforcing mechanism, the ad allocations across different consumer types depend crucially on how much nuisance of an ad "costs" consumers relative to the value it brings to them. Interestingly, higher-type consumers, who value content and advertising quality highly, may see more ads than lower-type consumers if the nuisance cost is relatively low. Furthermore, the standard downward quality distortion generally fails to materialize in a two-sided market and may even be reversed: higher-type consumers may be exposed to too few ads that result in a lower total quality than the socially efficient level, whereas lower-type consumers may receive a socially excessive quality. The circumstances under which the self-reinforcing mechanism may be weakened and the implications for media platform design are explored.
Keywords: Price discrimination, two-sided market, platform design, media pricing, advertising, ad avoidance, targeting
JEL Classification: M3, D4, L1
Suggested Citation: Suggested Citation