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The authors analyze the optimal strategy of a high-quality incumbent that faces a low-quality adsponsored competitor. In addition to competing through adjustments of tactical variables such as price or advertising intensity, they allow the incumbent to consider changes in its business model. They consider four alternative business models, two pure models (subscription-based and ad-sponsored) and two mixed models that are hybrids of the two pure models. They show that the optimal response to an ad-sponsored rival often entails business model reconfigurations, a phenomenon that we dub "Competing through business models."
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