Endogenous Consumption and Metered Paywalls

Digital content platforms increasingly implement paywalls to generate subscription revenue, but putting content behind paywalls can reduce consumption and advertising revenue. We analyze optimal paywall design when consumers are heterogenous in their valuation for and satiation with content and endogenously determine their consumption. We find that, under moderate ad rates, a metered paywall offering a limited amount of free content is optimal when consumers display sufficient heterogeneity in satiation. When ad rates increase, one might expect platforms to offer more free content to generate higher ad revenue. Instead, we find that sometimes offering less free content and lowering the subscription price is optimal to attract new subscribers. Further, depending on ad rates, the optimal amount of free content may increase or decrease in consumers’ valuation for content. As valuation increases, consumers’ willingness to pay for subscription and 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 users who become satiated relatively faster because the platform may strategically raise its meter limit to increase ad revenues from nonsubscribers. We also explore the impact of a more appealing outside option for consumers, competition between media platforms, and correlation between valuation and satiation on the optimality of paywalls.