| Abstract: |
This paper investigates the upcoming business model of online streaming
services allowing music consumers either to subscribe to a service which
provides free-of-charge access to streaming music and which is funded by
advertising, or to pay a monthly flat fee in order to get ad-free access to
the content of the service accompanied with additional benefits. Both
businesses will be launched by a single provider of streaming music. By
imposing a two-sided market model on the one hand combined with a direct
transaction between the streaming service and its flat-rate subscribers on the
other hand, the investigation shows that it can be highly profitable to launch
a business which is free-of-charge for subscribers if advertising imposes a
weak nuisance to music consumers. If this is the case, and by imposing an
endogenously determined level of advertising which will be provided by
homogeneous advertisers, the analysis shows that the monopolistic streaming
service increases the price for its flat-rate subscribers in order to
stimulate free-of-charge demand and to capture higher revenues from
advertisers. An extension of the model by illegal file-sharing reveals that an
increase in copyright enforcement shifts rents from music consumers to the
monopolistic provider, moreover a maximal punishment for piracy will be
welfare-maximizing. -- |