Zero Pricing Platform Competition

Abstract

This article studies competition between different types of ad-funded platforms attracting consumers with free services. Consumers often find advertisements a nuisance on such platforms. We study how under a competitive setting platforms balance the tension between attracting consumers and rent extraction from the advertising side. We propose a flexible yet simple model that studies competition between standard platforms and social media platforms (with same-side network effects). We find that an increase in either positive same-side network effects or an increase in consumer disutility from advertisements leads to a reduction in the number of ads on that platform. When competing platforms merge, consumer side network effects do not impact prices and the number of ads is higher. In a setting where consumers present a negative (congestion) externality on each other, competition fails to protect consumer welfare and behaves erratically. Finally, we present a few extensions and discuss some policy implications.