To Tax or To Subsidize: The Economics of User‐Generated Content Platforms

Abstract

As the Internet has been penetrating every aspect of our lives, we have witnessed a significant expansion of online platforms for sharing user-generated content during the past decade. Well-known examples are YouTube, Flickr, and Yahoo! Answers. On these platforms, users can view content for free while they post content voluntarily. Recently, turning the user-generated content into profit has become increasingly important for platform owners, as the operational cost (e.g., bandwidth, energy, marketing) for managing user-generated content platforms is skyrocketing. In this chapter, we study the economics of user-generated content platforms from the perspective of maximizing profit of platform owners, particularly focusing on the question of whether the platform owner should subsidize content producers for their contribution or tax them for using the platform's service. Based on formal analysis of a three-stage game modeling the interactions among the platform owner, content producers and content viewers, we derive the optimal profit-maximizing payment scheme and give our recommendation as to when the platform owner should subsidize or tax content producers for profit maximization.