Managing conflicting revenue streams from advertisers and subscribers for online platforms

Abstract

This paper considers a typical ad-supported online video platform with two interacting revenue streams: ad display and ad-free subscription. In practice, ad display and ad-free subscription serve different customers and are typically operated by separate divisions. Within this context, there is clearly a need for the platform to align the decentralized pricing for two interacting services. Motivated by this practical problem, this paper proposes an easy and operable coordination mechanism for the platform to coordinate the division-level pricing to maximize its total revenue. We first model the pricing under both centralized and decentralized settings. The derived equilibrium reveals that, contrary to typical negative relationships between price and demand in one-sided and most two-sided markets, a positive relationship (higher ad-free subscription fees lead to more advertising on the other side) is observed on this platform. If this indirect relationship is ignored, decentralized pricing will always underprice ad-free subscription. We then propose an easy-to-implement coordination mechanism consisting of customer-oriented subsidies and fees for the platform to maximize the total revenue. Our analysis shows the proposed coordination can be self-financed as long as the ad-watching cost is relatively low or the advertiser base is relatively large. These findings not only apply to online video platforms, but to any digital platform generating interacting revenue streams from both sides, such as online gaming platforms.