Strategies to Fight Ad-Sponsored Rivals

Abstract

We analyze the optimal strategy of a high-quality incumbent that faces a low-quality ad-sponsored competitor. In addition to competing through adjustments of tactical variables such as price or the number of ads a product carries, we allow the incumbent to consider changes in its business model. We consider four alternative business models, a subscription-based model, an ad-sponsored model, a mixed model in which the incumbent offers a product that is both subscription-based and ad-sponsored, and a dual model in which the incumbent offers two products, one based on the ad-sponsored model and the other based on the mixed business model. We show that the optimal response to an ad-sponsored rival often entails business model reconfigurations. We also find that when there is an ad-sponsored entrant, the incumbent is more likely to prefer to compete through the subscription-based or the ad-sponsored model, rather than the mixed or the dual model, because of cannibalization and endogenous vertical differentiation concerns. We discuss how our study helps improve our understanding of notions of strategy, business model, and tactics in the field of strategy.

Business model innovation – state of the art and future challenges for the field

“…In this category, a business model's function is defined as supporting management in defining and developing the firm's strategy (e.g. Porter, ; Chesbrough and Rosenbloom, ; Osterwalder, ; Osterwalder et al., ; Baden‐Fuller and Morgan, ; Casadesus‐Masanell and Ricart, ; Casadesus‐Masanell and Zhu, , ; Gambardella and McGahan, ; Lecocq et al., ; Plé et al., ; Teece, ; George and Bock, ; Aspara et al., ; De Reuver et al., ; Enkel and Mezger, ; Günzel and Holm, ; Kastalli and Looy, ; Markides, ; Schneider and Spieth, ; Simmons et al., ).…”

“…A business model is further understood to be the logic ‘for creating value’ (Linder and Cantrell, , p. 13); as the logic ‘that connects technical potential with the realization of economic value’ (Chesbrough and Rosenbloom, , p. 529); and as the general logic ‘of the firm, the way it operates and how it creates value for its stakeholders’ (Casadesus‐Masanell and Ricart, , p. 196). Furthermore, noticeable is the increasing tendency to understand ‘the business model [as] a set of committed choices that lays the groundwork for the competitive interactions’ (Casadesus‐Masanell and Ricart, ; Casadesus‐Masanell and Zhu, , p. 1485; Plé et al., ). Finally, the business model is understood in this third perspective as a tool or concept ‘to position the value proposition in the value chain’ (Sabatier et al., , p. 442); and as a concept ‘which helps to describe an economic activity or potentially a framework’ (Lecocq et al., , p. 214) and that contains a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm (Osterwalder and Pigneur, ; Osterwalder, ; Osterwalder et al., ).…”

Threat of platform‐owner entry and complementor responses: Evidence from the mobile app market

“…Our study also contributes to the empirical literature on how firms react to entry threat (e.g., Goolsbee & Syverson, ; Prince & Simon, ; Seamans, ). A large body of strategy literature has examined firms' ex post responses to entry (e.g., Casadesus‐Masanell & Zhu, ; Lieberman, , ; McCann & Vroom, ; Simon, ); however, the empirical literature on firms' ex ante responses to entry is relatively scant (e.g., Ethiraj & Zhou, ; Goolsbee & Syverson, ; Wilson, Xiao, & Orazem, ), partly due to the difficulty of empirically identifying the threat of entry separately from actual entry. Most entry‐threat studies focus on how firms respond to threats from comparable or smaller entrants, where both entry deterrence and entry accommodation motives could exist.…”

The Role of Coordination Bias in Platform Competition

“…In the context of our model, the business models are characterized only by access fees. In reality, the choice of a business model is related to important decisions on the structure of firm, architecture of supply chain, or investment in marketing (see, e.g., Hagiu and Halaburda, ; Casadesus‐Masanell and Zhu, ).…”

“…Specifically, our paper analyzes the choice of the business model in the context of two‐sided platforms. As pointed by Rochet and Tirole () and by Casadesus‐Masanell and Zhu (), in the context of two‐sided markets, one of the most important aspects of the business model is which side of the market is the primary source of the revenue. Casadesus‐Masanell and Zhu () consider an incumbent and entrant that can choose between a traditional business model in which they charge a price to consumers, or sponsor‐based business model in which they earn revenues from sponsors that negatively affect consumers' utility.…”