Economic Analysis of Network Effects on Sponsored Content: A Hierarchical Game Theoretic Approach

Abstract

Sponsored content policy enables a content provider to pay a network operator, and thereby their users access contents from the content provider through network services from the network operator with lower charge. In this paper, we study the interaction among three entities under the sponsored content policy, namely, the network operator or service provider, the content provider and the end-users. We consider a hierarchical three-stage setting to formulate the game theoretic model to analyze the interaction. Using the game model, we derive the user content demand, optimal sponsoring of content provider, and pricing of service provider based on backward induction. The model incorporates the network effects in social domain and congestion in network domain which enables us to obtain insights from the sponsored content policy. We derive the closed-form solution, i.e., equilibrium, and prove its existence and uniqueness in each stage of the game. Additionally, we develop an iterative algorithm to obtain the Stackelberg equilibrium of the entire three-stage game. The simulation results indicate that the revenue, profit, and utility of the service provider, content provider, and end-users have been improved to a large extent under the sponsored content policy because of the network effects.