Business strategy analysis for an advertising service supply chain: a study with the publication industry

Abstract

In the publication industry, three business strategies are commonly observed, namely the subscription-based strategy, ad-sponsored strategy, and mixed strategy. In order to obtain managerial insights into the three business strategies, we consider a supply chain in which a publisher sells a product such as newspaper and magazine to end-customers. Furthermore, the publisher may also sell advertisement space to advertisers. In such a supply chain, the publisher determines the optimal business strategy and corresponding prices and fees; the advertisers determine the amount of advertisement space to purchase from the publisher. We formulate a game-theory model of the above advertising service supply chain. Under this model, we first characterize each firm’s equilibrium decisions under each business strategy. We then compare the publisher’s profit under the three strategies to determine the publisher’s optimal strategy. We show that when the fixed cost of the mixed strategy is sufficiently low, it is optimal for the publisher to adopt the mixed strategy irrespective of the number of advertisers. If the fixed cost of the mixed strategy is high, it is optimal for the publisher to adopt either the subscription-based or ad-sponsored strategy, depending on the other parameters’ values. However, advertisers do not always obtain their highest profits under the publisher’s optimal strategy. We show regions where the publisher and advertisers have conflicting incentives. Both the fixed cost of the mixed strategy and the number of advertisers turn out to be key factors that lead to incentive conflicts in the supply chain.