Fee or subsidy? Pricing strategies for digital content platforms with different content and advertising

Abstract The practice of offering basic and premium services with different content and advertising on digital content platforms has gained popularity. The challenge of balancing subscription fees and advertising fees to maximize revenue has led some platforms to charge consumers for the basic service, while others subsidize it. Therefore, this study aims to examine whether consumers should be charged or subsidized for the basic service, which includes lower‐quality content and advertisements. By utilizing an optimization model, we discover that when there is a significant surplus of advertising or a slight surplus of advertising with a minimal profit to advertisers, the platform should charge. However, when the surplus of advertising is low and the profit to advertisers is high, the platform should subsidize. Furthermore, under partial market coverage, when the surplus of advertising is low and the profit to advertisers is moderate, the platform should initially charge and then subsidize as the content quality difference increases. Surprisingly, the intuition that the pricing of the basic service and advertising should decrease with the nuisance of advertising and increase with the surplus of advertising may not always hold true. This study led to a novel approach to exploring differentiated pricing for digital content platforms, taking into account the advertising information value from a bilateral market perspective.