Which is the Optimal Commercial Mode for a Video Site: Paid, Free, or Hybrid?

Abstract

A monopolistic video site provides three commercial modes for viewers: paid, free, and hybrid. In paid mode, the video site provides high-definition video with no advertising (“paid video”), but viewers must pay for watching; in free mode, the video site provides free video with high or standard definition, and viewers have to watch advertisements; in hybrid mode, the video site provides both paid and free video. Our objective is to determine the optimal price, advertising amount, and free video definition to maximize the site’s profits according to viewer characteristics. In doing so, we take into account bandwidth costs, which are correlated with video definition. We study the optimal profit of the video site in different cases and find that in free mode, the video site should provide high-definition free video. Through numerical examples, we find that the system parameters determine whether the optimal profit can be obtained by providing paid, free, or hybrid mode.