Paying to remove advertisements

Casual observation suggests that Internet media firms sometimes allow consumers to pay to remove advertisements from a free advertisement-based product. In this paper I characterize when this business model is optimal and analyze its impact on advertising quantity and the distribution of surplus. The optimality of the business model depends on the relation between product quality, the annoyance of advertisements and on advertisers' profit margins from selling goods to consumers. I show that when consumers can pay to remove advertisements, advertisement quantity increases and the firm and the advertisers gain at the expense of consumers. Further, advertising quantity and firm profits may be increasing in the annoyance of advertisements. The impact on total welfare is ambiguous. JEL Classification: D42, L15, L59, M37