Published: February 13, 2009Pages: 15Keywords: Advertising; Damaged goods; Media markets; Price discrimination; Two-sided markets; Vertical differentiationJEL-codes: D42; L15; L59; M37
Paying to Remove Advertisements
Media firms sometimes allow consumers to pay to remove advertisements from an advertisement-based product. We formally examine an ad-based monopolist's incentives to introduce this option. When deciding whether to introduce the option to pay, the monopolist compares the potential direct revenues from consumers with lost advertising revenues from not intermediating those consumers to advertisers. If the option is introduced, the media firm increases advertising quantity to make the option to pay more attractive. This hurts consumers, but benefits the media firm and advertisers. Total welfare may increase or decrease. Perhaps surprisingly, more annoying advertisements may lead to an increase in advertising quantity.