Demand‐driving innovation, advertising nuisance, and a media platform optimal pricing

Abstract

AbstractThis paper explores the incentives of a monopolistic media platform to invest in demand‐driving innovation when the interactions between its customer groups (eyeballs and advertisers) are countervailing. We investigate whether media innovation contributes to resolving the trade‐off between catering to both groups (or sides) and minimizing advertising nuisance. We identify an innovation threshold guiding the media platform on when to charge more eyeballs than advertisers, effectively reversing the standard divide‐and‐conquer pricing strategy. Moreover, we show that the media platform invests more in research and development (R&D) on the side with the strongest reference market, and we highlight the role of excessive inertia and momentum in shaping innovation. Furthermore, we find that when the relative advertising nuisance is low, the platform is less encouraged to innovate on both sides when the ad nuisance increases marginally. However, when the relative advertising nuisance is high, we infer an R&D see‐saw rule: a marginal increase in the ad nuisance reduces the R&D efforts undertaken on one side and increases those on the other. Our findings provide insights into the complex interplay between media platform innovation and pricing strategy in the presence of advertising nuisance and a challenging chicken‐and‐egg problem.