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Freemium as optimal menu pricing

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  • Sato, Susumu

Abstract

In online contents markets, content providers collect revenues from both consumers and advertisers by segmenting consumers who are willing to avoid advertisements and who are not. To analyze such situations, I construct a model of menu pricing by advertising platforms in two-sided markets. I find that, under certain condition, although a monopolistic platform can choose any menu of price-advertisement pairs, the optimal menu consists of only two services: ad-supported basic service and ad-free premium service. In addition, if the willingness to pay of advertisers is sufficiently high, the basic service is offered for free. This menu pricing is well known as freemium. Furthermore, this binary structure remains to hold under several extensions including duopoly platform competition.

Suggested Citation

  • Sato, Susumu, 2019. "Freemium as optimal menu pricing," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 480-510.
    • Handle: RePEc:eee:indorg:v:63:y:2019:i:c:p:480-510
    DOI: 10.1016/j.ijindorg.2018.12.006
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    Cited by:

    1. José A. Novo‐Peteiro, 2023. "Product design with attribute dependence," Manchester School, University of Manchester, vol. 91(4), pages 361-385, July.
    2. Neaketa Chawla & Debasis Mondal, 2022. "Platform competition and price discrimination," Indian Economic Review, Springer, vol. 57(1), pages 1-21, June.
    3. Naixin Zhu, 2023. "Dissertation on Applied Microeconomics of Freemium Pricing Strategies in Mobile App Market," Papers 2305.09479, arXiv.org.
    4. Gang Liu & Fengyue An, 2021. "Video Platforms’ Value-Added Service Investments and Pricing Strategies for Advertisers," Sustainability, MDPI, vol. 13(24), pages 1-24, December.
    5. Kohei Kawaguchi & Toshifumi Kuroda & Susumu Sato, 2021. "Merger Analysis in the App Economy: An Empirical Model of Ad-Sponsored Media," HKUST CEP Working Papers Series 202103, HKUST Center for Economic Policy.
    6. Enache, Andreea & Friberg, Richard & Wiklander, Magnus, 2023. "Demand for in-app purchases in mobile apps—A difference-in-difference approach," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    7. Anzhela Ignatyuk & Inna Honcharuk & Bohdan Yakymchuk, 2020. "Price Optimization Model For Platform’S Goods And Services In Multi-Sided Markets," Baltic Journal of Economic Studies, Publishing house "Baltija Publishing", vol. 6(5).
    8. Zennyo, Yusuke, 2020. "Freemium competition among ad-sponsored platforms," Information Economics and Policy, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Freemium; menu pricing; two-sided markets;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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