Subscription price and advertising space decisions for online content firms with reference effect

Abstract

Abstract This paper investigates how an online content provider decides the optimal subscription price and the advertising space allocation considering the reference price effect. We consider a hybrid business model in which the provider offers both a subscription service to viewers and an advertising service to advertisers. The viewers consist of subscribers and non-subscribers, and the latter are only permitted to watch a fraction of the content. We develop a new reference price model by incorporating the viewer experience and examine both constant and dynamic scenarios. We find that it is not always optimal for the provider to adopt a hybrid business model. In particular, when the viewer’s sensitivity to advertising is relatively small, the provider should adopt a subscription-support model (i.e., offering paid content only). Moreover, the provider should reduce the advertising space when viewers pay more attention to the viewer experience. Under the dynamic scenario, we examine the impact of the reference effect on the provider’s decisions. We find that the stable value of the subscription price may not be consistent with the stable value of the reference price when the viewer experience is considered. By comparing profits under different scenarios, we find that when the provider neglects the reference effect, he will overestimate (underestimate) the profit if the initial reference price is relatively low (high).