Advertising versus pay-per-view in electronic media

Media providers frequently have to trade-off revenues from advertisers and subscribers. However, with contemporary electronic media, such as Internet websites, there exists the possibility of giving viewers of the same program the option to pay a higher price and view fewer advertisements, or pay a lower price but view more advertisements. With heterogeneous consumers, there will be some takers for both options, thereby allowing the media provider to derive the advantages of both subscription and advertising revenues. In this paper, we examine the number of options, the subscription price and the amount of advertising that should be offered to consumers. We find conditions where a pure advertiser-supported strategy or a pure pay-per-view strategy can be optimal. However, except under specified conditions, the optimal strategy is to charge a subscription price and have advertisements, but offer options to consumers. © 2003 Elsevier Science B.V. All rights reserved.