Endogenous Consumption and Metered Paywalls

Abstract

Digital content platforms increasingly implement paywalls to generate subscription revenues, but putting content behind paywalls reduces consumption and advertising revenues. This research analyzes optimal paywall design when consumers endogenously decide their consumption. We find that under moderate ad rates, a metered paywall under which a limited amount of content is provided for free is optimal when consumers display sufficient heterogeneity in their costs of consuming content. When ad rates increase, one typically expects platforms to offer more free content and thus generate higher ad revenues. Instead, we find that sometimes offering less free content and lowering the price can attract new subscribers, generating even higher revenues. Further, the optimal amount of free content may decrease or increase in consumers’ valuation for content, depending on ad rates. As consumers’ valuation increases, their willingness-to-pay for subscription and their desire for content consumption increases. The former effect dominates under low ad rates and incentivizes the platform to provide less free content, but the opposite is true under high ad rates. Counterintuitively, we also find that total content consumption can increase with the proportion of light users, because the platform may strategically raise its meter limit to increase ad revenues from non-subscribers.