Advertising pricing models in media markets: Lump-sum versus per-consumer charges

Abstract

Based on a model of asymmetric competition between a pay and a free media platform, this paper investigates advertising pricing models. The pay media platform generates revenues from media consumers through subscription fees, while the free media platform generates revenues from charging advertisers either on a lump-sum basis (regime A) or on a per-consumer basis (regime B). We show that the free platform produces a higher advertising level and attracts more consumers in regime A than B although advertisers must pay more for ads and consumers dislike ads. Moreover, the pay media platform faces higher subscription fees and lower consumer demand in regime A than B. Compared to regime B, the profit of the free (pay) media platform is higher (lower) in regime A, while aggregate profits are higher only if the consumers’ disutility from ads is sufficiently low. In addition, advertisers are better off in regime A than B, while the opposite is true for the media consumers. Finally, in small media markets, social welfare is lower in regime A than B, while this is true in large media markets only if the media consumers’ disutility from advertising is sufficiently high.