Essays on ad-supported business model competition, cost asymmetry and forward trading

This dissertation explores several aspects of the theory in industrial organization.

The first chapter builds a model with two cost asymmetric firms who not only have Cournot competition in the spot market but also have the opportunity to trade forward contracts. It is shown that with forward trading, low cost firm not always produces more than high cost firm. In an interior equilibrium, both total output and consumer welfare increase compared to the case without forward trading. When cost function is linear, forward trading is socially beneficial in that low cost firm has higher market share as well as profit share, and that total output, consumer welfare and social welfare increase.

The second chapter analyzes duopoly firms' choices among ad-free and ad-supported service with different advertising displays: mandatory advertising where ads are integrated with the main content and cannot be dismissed by users; or optional advertising where users are allowed to dismiss ads at will. The model also takes into account the effect of consumers' heterogeneous ad tastes on their contribution to ad revenues. The results reveal that ad revenues intensify competition, suppress equilibrium prices and profits, and diminish the differentiation effect.

The third chapter studies firms' business model choices and pricing decisions when they can choose to provide ad-free service, ad-supported service with cost-per-click (CPC) revenue model or cost-per-mille (CPM) revenue model, or a combination of them in monopoly or duopoly environment. It's shown that offering both types of ad-supported services is not an optimal strategy for a monopolist and that its optimal strategy is to vertically differentiate by providing an ad-supported service and an ad-free service. Furthermore, when the monopolist adopts the CPM-based ad revenue model, the price of the ad-supported service is more sensitive to increases in the marginal ad revenue than the case with the CPC-based model. In the equilibrium of competitive setting, exactly one firm offers an ad-supported service alone while the other firm offers the ad-free service with or without the same type of ad-supported service depending on the ad revenues.