Endogenous Choice on Advertising Pricing of Media Platforms: Lump-Sum Fee vs. Proportional Fee

Abstract

Media platforms usually generate revenues from consumers through a subscription fee, but face the choice between lump-sum fees and proportional fees when they charge advertisers. This paper builds a two-stage dynamic game to solve an endogenous choice problem with regard to the advertising pricing instruments of two platforms competing for single-homing consumers and advertisers. If platforms can switch freely between different price instruments, the dominant strategy is that both platforms charge advertisers a proportional fee, from which more profits are generated. If one platform finds it technically infeasible to adopt proportional fee so that it has to charge a lump-sum advertising fee, the rival platform can gain an advantage in terms of both market shares and profits by charging one group a lump-sum fee and the other a proportional fee, but the comparison between the two platforms’ advertising prices is ambiguous.