Intermediation for Variety Seeking in a Subscription Market : A Monopoly Trap?

Recent times have witnessed the emergence of a business model where an intermediary sells a subscription plan that covers visits to multiple merchants. Examples abound, with ClassPass, Instacart, and Moviepass being a few prominent ones. The purpose of our study is to put this model under a microeconomic lens in order to examine its potential impact on private profits and public welfare. We consider a subscription market with two competing merchants. The plans offered by them are imperfect substitutes for each other, and consumers span the Hotelling line between the two. Despite their usual preference for the nearest merchant, consumers also seek some variety, a flexibility not afforded by either merchant’s plan. If an intermediary now enters this market, its new plan would bring this flexibility to consumers and allow them to satisfy their need for variety, all for a single subscription fee. For every unit demanded through the intermediary, merchants would receive a contracted transfer price. We ask: (i) can an intermediary make a successful entry, and (ii) would consumers be better off if it does? The putative answers to both are in the affirmative. We test the veracity of these answers using a modeling experiment and identify conditions under which they may or may not be correct. Our observations add to the literature and bear relevance for management and policy