Second-Degree Discrimination on social media platforms
https://link.springer.com/content/pdf/10.1007%2Fs00199-018-1107-y.pdf
In this article, the author studied second-degree discrimination through different methods of advertising on social platforms. Second-degree discrimination is when a platform offers a “two-version bundle of their services”, such as a free version and a premium version. The premium version of the platform is purchased at a price and offers network externalities that the consumers can enjoy, which is referred to as “externality premiums” while the free version includes ads. We see this on platforms such as Spotify. One popular example of a solely free version used across the platform is Yelp because it only offers a free version of its services with advertisement. The author then demonstrated multiple mathematical proofs, such as the Power Law we learned about in class, to investigate if and when a premium version or free version should solely be used on the platform, or the use of both versions, which is referred to as “versioning”.
The author looked into if and when only a premium version should be the optimal decision for a platform. He found that when there are relatively low optimal prices of the advertised product because of market conditions, the premium version should be used rather than versioning. In other words, the premium version is the platform’s optimal choice for relatively low prices of the advertised product if one simply considers that “advertising raises the dispersion of the product’s valuations”.
Next, he looked into if and when versioning should be used for a platform instead of just the free version. He found that versioning should be used instead of solely free when there are “sufficiently high values of the externality premium”. This means that when the premium version offers enough enjoyable network externalities for consumers compared to the free version, versioning should be used because it makes the premium version look very attractive to the consumer.
This article relates to concepts we’ve learned in class when dealing with how consumers will react on the platform. It applies concepts of price and demand affecting whether or not versioning, free or premium should be used on a platform to increase profit. The author also used the power-law degree distribution to demonstrate what the optimal pricing features should be on different platforms.