Monetizing digital content with network effects: A mechanism-design approach
By Vincent Meisner, Pascal Pillath
DOI https://doi.org/10.48550/arXiv.2408.15196
Abstract
We design profit-maximizing mechanisms to sell an excludable and non-rival goodwith positive and/or negative network effects. Buyers have heterogeneous privatevalues that depend on how many others also consume the good. In optimum, anendogenous number of the highest types consume the good, and we can implementthis allocation in dominant strategies. We apply our insights to digital contentcreation, and we are able to rationalize features seen in monetization schemesin this industry such as voluntary contributions, community subsidies, andexclusivity bids.
Introduction
The “creator economy” refers to a market where individuals produce and share digital content on platforms like Instagram, OnlyFans, Snapchat, TikTok, Twitch, and YouTube. This market is valued at over $100 billion. While some creators achieve significant earnings, many cater to smaller audiences and find it challenging to sustain themselves financially. Despite these challenges, the appeal of becoming a content creator continues to grow, leading to the emergence of various payment models to support smaller creators.
The authors focus on three key features of this market:
Oligopsony: A market situation where a few buyers substantially control the market and drive prices down.
Network Effects: The phenomenon where a product’s value changes based on the number of users.
Non-Rivalry of Digital Content: Digital content can be consumed by multiple users simultaneously without depletion.
The paper aims to design optimal monetization strategies for creators with small audiences, highlighting that these strategies differ significantly from traditional pricing models used for larger audiences.
Key Concepts Explained
Excludable and Non-Rival Goods: An excludable good is one where access can be restricted (e.g., subscription-based content). A non-rival good means one person’s consumption doesn’t reduce its availability to others (e.g., digital music).
Mechanism Design: A field in economics and game theory that seeks to design rules or mechanisms to achieve specific outcomes, even when participants have private information.
Private Values with Network Effects: Each consumer has a personal valuation of the content, which is influenced by the number of other consumers. For example, a social media platform becomes more valuable as more friends join.
Findings
The authors propose that the optimal number of consumers is determined by selecting those with the highest valuations for the content. This selection can be implemented through mechanisms where consumers voluntarily contribute, often paying more than others, to access the content. Such mechanisms align with observed practices in the digital content industry:
Voluntary Contributions: Platforms like Twitch allow users to “tip” creators, providing additional revenue beyond standard subscriptions.
Community Subsidies: Some platforms offer community-funded models where users collectively support content creation, ensuring access for all contributors.
Exclusivity Bids: Creators may offer exclusive content to higher-paying subscribers, incentivizing larger contributions for premium access.
Conclusion
The study provides a framework for understanding and designing profit-maximizing strategies for digital content creators, especially those with smaller audiences. By considering network effects and the non-rival nature of digital content, creators can implement mechanisms that encourage voluntary contributions and community support. These strategies not only enhance profitability but also ensure the sustainability of content creation in the evolving digital landscape.