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Hit the GAS: Designing Optimal Generalized Ad-supported Subscription Mechanisms

Dominik Gutt¹; Sameer Mehta²; Martin Quinn³

¹ Erasmus Universiteit Rotterdam, Rotterdam School of Management, Business Information Management, Rotterdam, Netherlands · ² Erasmus University Rotterdam Rotterdam School of Management, Technology and Operations, Rotterdam, 3062 PA, Netherlands · ³ Erasmus Universiteit Rotterdam, Rotteram School of Management, Rotterdam, 3000 DR, Netherlands

Digital Content Platforms (DCPs), such as Netflix and Spotify, rely on subscriptions and advertising as their primary revenue sources. Beyond pure subscription-only and ad-only revenue models, DCPs increasingly blend these models by offering a two-tier menu: a free, ad-supported tier for price-sensitive users and a paid, ad-free tier for ad-sensitive users. In this paper, we introduce the Generalized Ad-Supported Subscription (GAS) mechanism – a broad class of subscription-fee and ad-intensity combinations that spans the continuum from ad-only to subscription-only – and nests the traditional mechanisms as special cases. Using a mechanism-design framework, we characterize the revenue-maximizing GAS mechanism and compare its performance with the optimal ad-only, subscription-only, and two-tier mechanisms. While GAS is optimal within this broad class, the simpler two-tier mechanism can achieve near-optimal revenue. We then characterize conditions under which the GAS mechanism delivers a material revenue advantage over the two-tier mechanism. Finally, we estimate our model parameters and empirically validate the theoretical results in the context of Video-on-Demand platforms.

DOI

10.1287/isre.2025.2329

Language

en

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