Pricing Strategy of Competing Media Platforms

Wilfred Amaldoss (), Jinzhao Du () and Woochoel Shin ()
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Wilfred Amaldoss: Marketing at Fuqua School of Business, Duke University, Durham, North Carolina 27708
Jinzhao Du: Marketing at HKU Business School, The University of Hong Kong, Hong Kong
Woochoel Shin: Marketing at Warrington College of Business, University of Florida, Gainesville, Florida 32611

Marketing Science, 2024, vol. 43, issue 3, 488-505

Abstract: Media platforms generate revenue by bringing consumers and advertisers together. Although advertisers like to promote their services and products to consumers, consumers dislike advertisements to varying levels. Given heterogeneity in consumers’ dislike for ads, platforms could adopt either a uniform pricing strategy or a tiered pricing strategy for consumers. In this paper, we examine competing media platforms’ equilibrium pricing strategies in the presence of cross-side externalities between consumers and advertisers and their endogenous homing decisions. We find that symmetric platforms may adopt asymmetric pricing strategies in an attempt to focus on different sides of the market and soften interplatform competition if the incremental value that consumers derive from multihoming is large. However, they pursue only symmetric pricing strategies if this value is small. Counter to the intuition based on one-sided markets, our analysis shows that tiered pricing strategies need not improve the profits of platforms competing in a media market. In fact, when the incremental value that consumers derive from multihoming is large, competing platforms may earn lower profits from tiered pricing and yet pursue it (Prisoner’s dilemma). In contrast to standard results on tiered prices, we find that high-type consumers may not pay as much as their full willingness-to-pay for ad avoidance, implying that the incentive-compatibility constraint of high-type consumers may not be binding. Finally, we extend the model to allow for heterogeneous advertisers, vary the decision sequence, permit platforms to compete on ad capacity (rather than ad price), entertain an alternative formulation of transportation cost, and consider correlated advertising reach.

Keywords: two-sided platforms; media markets; pricing strategy; tiered pricing; cross-side externalities; multihoming; single-homing (search for similar items in EconPapers)
Date: 2024
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