Free vs fee: a model of price discrimination

Abstract

I study the trade-off faced by a firm that operates on a platform and generates revenues from subscriptions and advertising in an economy with heterogeneous agents. I present a basic model with a no-discrimination policy, as it is the main business strategy many firms adopt in this field. In this scenario, the firm can choose a subscription fee and a paywall (readings free of charge). I show that whether or not it is optimal to use these tools depends on the consumer types’ distribution. In addition, I extend this structure by considering a screening model that allows the firm to offer different contracts to different types of consumers. Such a policy allows the firm to increase its profits. Finally, I conduct an empirical analysis with a unique database from one of the leading traditional Argentinian media outlets. I calibrate the model and study the optimality of the firm policy choice. I show that by changing the policy in the margin, the firm can increase its profits. In addition, I suggest a few changes in the firm’s policy such as price discrimination based on location and free access to some notes.