Hit the GAS: Designing Optimal Generalized Ad-supported Subscription Mechanisms

Digital Content Platforms (DCPs), such as Netflix and Spotify, rely on subscriptions and advertising as their primary revenue sources. Beyond pure subscription-only and ad-only revenue models, DCPs increasingly blend these models by offering a two-tier menu: a free, ad-supported tier for price-sensitive users and a paid, ad-free tier for ad-sensitive users. In this paper, we introduce the Generalized Ad-Supported Subscription (GAS) mechanism – a broad class of subscription-fee and ad-intensity combinations that spans the continuum from ad-only to subscription-only – and nests the traditional mechanisms as special cases. Using a mechanism-design framework, we characterize the revenue-maximizing GAS mechanism and compare its performance with the optimal ad-only, subscription-only, and two-tier mechanisms. While GAS is optimal within this broad class, the simpler two-tier mechanism can achieve near-optimal revenue. We then characterize conditions under which the GAS mechanism delivers a material revenue advantage over the two-tier mechanism. Finally, we estimate our model parameters and empirically validate the theoretical results in the context of Video-on-Demand platforms.