Business strategy analysis for an advertising service supply chain: a study with the publication industry

Abstract

In the publication industry, three business strategies are commonly observed, namely the subscription-based strategy, ad-sponsored strategy, and mixed strategy. In order to obtain managerial insights into the three business strategies, we consider a supply chain in which a publisher sells a product such as newspaper and magazine to end-customers. Furthermore, the publisher may also sell advertisement space to advertisers. In such a supply chain, the publisher determines the optimal business strategy and corresponding prices and fees; the advertisers determine the amount of advertisement space to purchase from the publisher. We formulate a game-theory model of the above advertising service supply chain. Under this model, we first characterize each firm’s equilibrium decisions under each business strategy. We then compare the publisher’s profit under the three strategies to determine the publisher’s optimal strategy. We show that when the fixed cost of the mixed strategy is sufficiently low, it is optimal for the publisher to adopt the mixed strategy irrespective of the number of advertisers. If the fixed cost of the mixed strategy is high, it is optimal for the publisher to adopt either the subscription-based or ad-sponsored strategy, depending on the other parameters’ values. However, advertisers do not always obtain their highest profits under the publisher’s optimal strategy. We show regions where the publisher and advertisers have conflicting incentives. Both the fixed cost of the mixed strategy and the number of advertisers turn out to be key factors that lead to incentive conflicts in the supply chain.

Keywords:

• supply chain management
• advertising service supply chain
• business strategy
• subscription-based strategy
• ad-sponsored strategy

Acknowledgements

This research was supported partially by the National Natural Science Foundation of China (71371052, 71671043, 71672153, 71440016), the Program for New Century Excellent Talents in University (NCET-13-0733), the Fundamental Research Funds for the Central Universities (2682014CX114), and the Fundamental Research Funds for the Central Universities in UIBE (CXTD6-01).

Notes

1 Even though the subscription-based strategy now may not be as commonly seen as the other two strategies, we use it herein as a benchmark to compare the other two strategies with it.

2 Our paper deploys a game-theory approach taking consumer utility into account, which is similar to Zhang and Zeephongsekul (2013) and Lin et al (2012).

3 The linear function of consumer disutility in advertisement fee is supported by some empirical studies (Wilbur, 2008; Depken II and Wilson, 2004) and also adopted by some analytical papers in the literature (Kind et al, 2007, 2009; Lin et al, 2012).