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Strategies to Fight Ad-Sponsored Rivals

Author

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  • Ramon Casadesus-Masanell

    () (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

  • Feng Zhu

    () (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

Abstract

We analyze the optimal strategy of a high-quality incumbent that faces a low-quality ad-sponsored competitor. In addition to competing through adjustments of tactical variables such as price or the number of ads a product carries, we allow the incumbent to consider changes in its business model. We consider four alternative business models: a subscription-based model; an ad-sponsored model; a mixed model in which the incumbent offers a product that is both subscription based and ad sponsored; and a dual model in which the incumbent offers two products, one based on the ad-sponsored model and the other based on the mixed business model. We show that the optimal response to an ad-sponsored rival often entails business model reconfigurations. We also find that when there is an ad-sponsored entrant, the incumbent is more likely to prefer to compete through the subscription-based or the ad-sponsored model, rather than the mixed or the dual model, because of cannibalization and endogenous vertical differentiation concerns. We discuss how our study helps improve our understanding of notions of strategy, business model, and tactics in the field of strategy.

Suggested Citation

  • Ramon Casadesus-Masanell & Feng Zhu, 2010. "Strategies to Fight Ad-Sponsored Rivals," Management Science, INFORMS, vol. 56(9), pages 1484-1499, September.
    • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:9:p:1484-1499
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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1199
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    References listed on IDEAS

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    Cited by:

    1. Hagiu, Andrei & Jullien, Bruno, 2014. "Search diversion and platform competition," International Journal of Industrial Organization, Elsevier, vol. 33(C), pages 48-60.
    2. Jianqing Chen & Ming Fan & Mingzhi Li, 2012. "Advertising versus Brokerage Model for Online Trading Platforms," Working Papers 12-12, NET Institute.
    3. Ramon Casadesus-Masanell & Gastón Llanes, 2011. "Mixed Source," Management Science, INFORMS, vol. 57(7), pages 1212-1230, July.
    4. Dietl, Helmut & Lang, Markus & Lin, Panlang, 2013. "Advertising pricing models in media markets: Lump-sum versus per-consumer charges," Information Economics and Policy, Elsevier, vol. 25(4), pages 257-271.
    5. Hagiu, Andrei & Jullien, Bruno, 2013. "Strategic Search Diversion, Product Affiliation and Platform Competition," CEPR Discussion Papers 9451, C.E.P.R. Discussion Papers.
    6. Gary Biglaiser & Andrei Hagiu, 2015. "Multi-Product Duopoly With Cross-Product Cost Interdependencies," Harvard Business School Working Papers 16-010, Harvard Business School.
    7. repec:pal:jorsoc:v:68:y:2017:i:12:d:10.1057_s41274-016-0167-2 is not listed on IDEAS

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    Keywords

    strategy; business models; tactics; advertising; pricing;

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