Abstract
Large language model (LLM) platforms introducing advertising must decide how much capability ad revenue should fund and what consumers should pay to avoid ads. We study a monopolistic platform that jointly chooses costly response quality, advertising intensity, and subscription prices when advertising reduces user value but better service raises advertising returns. Three findings follow. First, when partly ad-supported and ad-free plans coexist, advertising can finance useful service for consumers who receive none under pure subscription. Lower effective quality in middle plans weakens the alternatives available to premium users, allowing higher prices for unchanged ad-free service. Some fully ad-supported users gain utility, while partly ad-supported and ad-free users lose: broader access can coexist with utility polarization. Second, an intermediate advertising cap can maximize consumer surplus by preserving some revenue that finances service while limiting degradation. Third, cheaper compute can raise quality and reduce ad intensity, yet sufficiently large cost reductions can increase aggregate advertising revenue above its initial level because better service raises the value of the remaining advertised interactions. An extension shows how advertising-funded upgrades can bring plans to the same maximum capability and advertising exposure, eliminating the basis for different prices. These results make menu design central to evaluating LLM advertising: the consequences extend beyond users who see ads to the alternatives and prices faced by those who do not.
Abstract (translated)
URL
https://arxiv.org/abs/2610.32945
