Strategic analysis of an ad-supported content platform’s subsidy policy: The perspective of the producer’s pricing strategies

Abstract

We consider a content market with an ad-supported content platform and a representative producer in the presence of altruistic consumers. The platform may launch different subsidy policies (i.e., a monetary subsidy based on the content demand that directly improves marginal profit or a traffic subsidy that directly improves content quality), and the producer creates content under two pricing strategies (i.e., a fixed pricing strategy and a pay-as-you-wish strategy where consumer can pay for the content as they wish). We develop a stylized model and investigate which subsidy policy is a better choice for the platform when the producer is delegated pricing power. Under a fixed pricing strategy, the platform gets a higher profit in the traffic subsidy policy when the consumers’ basic utility is not too low or the quality cost is small, while the producer gets a higher profit in the traffic subsidy when consumers’ basic utility is high or the quality cost is small. Hence, both subsidy policies can achieve the “win-win” situation under certain conditions. Under the pay-as-you-wish strategy, the platform always gets a higher profit in the traffic subsidy policy, while the producer gets a higher profit in the traffic subsidy policy when the consumers’ basic utility for content is high. Hence, only the traffic subsidy policy can achieve the “win-win” situation under certain conditions. Due to the tradeoff between the subsidy enhancement effect on quality and the quality cost, we observe that although the traffic subsidy policy brings a higher content quality than the monetary subsidy policy under both pricing strategies, the producer can increase or decrease his content quality in the traffic subsidy policy compared with the monetary subsidy policy. Our paper provides guidance on how content platforms can provide the right subsidy policy to the producer.