Optimal Design of “Free” Content Provision for Online Platforms: Impacts of Advertising and Network Effects
30 Pages Posted: 18 Oct 2021
Date Written: October 14, 2021
The strategy of hybrid free trial has been adopted by online content platforms. This paper uses an analytical model to address a monopolistic platform’s optimal design of “free” content provision. We find that, given a fixed trial period, when the network effects are weak, offering an ad-sponsored free service is not typically optimal if the advertising rate is small; otherwise, the platform has incentives to provide free service without ads. Counterintuitively, a larger advertising rate does not always mean more ads should be offered when network effects are weak. When ads’ number is fixed, a trial period is desired if both the network effect strength and advertising rate are small. We also identify the threshold value of ads’ number, under which offering a trial period can be optimal even under relatively strong network effects if the advertising rate is moderate. The study advances our understanding of content provision strategy for platforms.
Keywords: hybrid trial; online content; content provision strategy; advertising; subscriptions
JEL Classification: M15
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