Advertising or Freemium: The Impacts of Social Effects and Service Quality on Competing Platforms

Abstract

We address the impacts of social effects and service quality on business model decisions through a game-theoretic model. These platforms, which integrate social networking services into their services, adopt either an advertising strategy or a freemium strategy. Thus, four strategy combinations that include two strategic substitute cases in which both platforms use either an advertising strategy or a freemium strategy and two strategic complement cases in which the platforms adopt different strategies are possible. We find that the advertising (freemium) strategy is dominant for each platform when its premium service quality is too low (high). Two equilibria in which both platforms adopt advertising and freemium strategies coexist, while the former one derives more profit. Moreover, we study the symmetric platform competition in which platforms use an advertising strategy or a freemium strategy simultaneously. Interestingly, we find if the strength of social effects is medium, the freemium strategy is also dominant when the quality of the premium service is too low. Finally, a win-win outcome that benefits customer surplus and platforms may arise under some conditions under which the basic service quality is too low (high), the premium service quality is too high (low), and a freemium (advertising) strategy is used.