Optimal Revenue Model of a Social Networking Service : Ad-Sponsored, Subscription-Based, or Hybrid?

We use a stylized model to investigate the revenue model decision for a monopolistic online platform offering social networking services. There are three possible revenue models: an ad-sponsored model offering a basic service, a subscription-based model offering a premium service, and a hybrid model offering both. We study a scenario in which the misfit cost for the premium service is lower than the basic service (the easy-to-use-premium-service), and a scenario in which the relationship is inverted (the hard-to-use-premium-service). We find the ad-sponsored revenue model is always dominated by the other two revenue models. For the case of the easy-to-use-premium-service, the subscription-based revenue model is optimal when the quality of the premium service is too low, the free service quality is moderate and the strength of the unit misfit cost of the premium service is too low. In the case of the hard-to-use-premium-service, the hybrid model is optimal when the strength of the unit misfit cost of the premium service is too large and the quality of the premium service is too low