A discount tier only expands a market if high-paying customers refuse to switch down to it. That refusal has to be engineered. When Netflix launched its ad-supported plan in November 2022 at $6.99 a month, the obvious worry was reference-price erosion: existing subscribers would see a cheaper line on the pricing page, decide they had been overpaying, and downgrade. That is not what happened. Subscriber growth accelerated over the following two years, and the company reported that the ad tier drew mostly new and returning members rather than defectors from higher plans.

The reason is that the cheap plan was not the same product at a lower price. It was the product with things taken away: ads interrupting every show, a lower maximum stream quality, no downloads at launch, and a catalog with holes where licensing deals did not permit ad breaks. Economists call this versioning, or in the blunter phrasing of the research literature, damaged goods. A firm deliberately degrades one version of its product so that customers sort themselves by willingness to pay. The degradation is not waste; it is the fence. Someone who would happily pay full price to avoid commercials looks at the ad tier, flinches, and stays where they are.

The clearest evidence that the ads were doing the fencing came later, when Netflix retired its cheap ad-free Basic plan in the US and UK in 2024. That plan was the leak: a low price whose only degradation was resolution and stream count, with no commercials attached. It was the one option a premium subscriber could step down to and lose nothing they cared about. Killing it left every cheap path running through the ads.