Publication Type

Journal Article

Version

Postprint

Publication Date

6-2012

Abstract

Designing business models that take into consideration the role of advertising support is critical to the success of online services. In this paper, we address the challenges of these business model strategies and compare different ad revenue models. We use game theory to model vertical differentiation in both monopoly and duopoly settings, in which online service providers may offer an ad-free service, an ad-supported service, or a combination of these services. Offering both ad-free and ad-supported services is the optimal strategy for a monopolist because ad revenues compensate for the cannibalistic effect of vertical differentiation. In a duopoly equilibrium, exactly one firm offers both services when the ad revenue rate is sufficiently high. Furthermore, we find that a higher ad revenue rate may lead to lower service prices. Consistently across both monopoly and duopoly settings, such price reductions are more severe in the cost-per-thousand-impressions model than in the cost-per-click model. Our findings emphasize the role of advertising revenues in vertical differentiation and offer strategic guidance for monetizing online services.

Keywords

ad-supported business models, e-commerce, economic analysis, game theory, online advertising, vertical differentation.

Discipline

Advertising and Promotion Management | Computer Sciences | Management Information Systems

Research Areas

Information Systems and Management

Publication

Journal of Management Information Systems

Volume

29

Issue

1

First Page

195

Last Page

236

ISSN

0742-1222

Identifier

10.2753/MIS0742-1222290106

Publisher

Taylor and Francis

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://dx.doi.org/10.2753/MIS0742-1222290106