Paying for Prominence: The Effect of Sponsored Rankings on the Incentives to Invest in the Quality of Free Content on Dominant Online Platforms

Abstract

Many independent content providers (CPs) offer free content through a dominant platform (e.g., an app store) and obtain revenues later from the usage of their content (e.g., through ads or in-app purchases). Attaining a more prominent placement on the platform is important for CPs, because it gives them more demand, and thus more revenues. We consider CPs' investment incentives to produce content quality under various ranking algorithms when the dominant platform demands a share of the CPs' revenues. We consider a game-theoretic model in which two CPs that differ in their efficiency to produce content quality compete for prominence on the platform. The platform commits to a revenue share and to a ranking algorithm that is either based on content quality (organic ranking) or bids (sponsored ranking), or a combination thereof. We highlight that CPs' incentives to invest in content quality under a given ranking regime can be explained by the interaction of four effects, that we denote as competition, uncertainty, revenue-share, and payment-reduction effect. We highlight how the strengths of these effects vary between different rankings and that it depends crucially on the CPs’ efficiency differences and the platform’s uncertainty to assess content quality which ranking yields the highest content quality, consumer surplus and platform profit. For instance, we show that under a pure sponsored ranking the platform demands the lowest revenue share, and that this ranking provides the highest investment incentives when CPs’ efficiency differences and the platform’s uncertainty are relatively high. We also study the case where the platform is vertically integrated with one CP and biases the ranking towards its own CP. We show that the platform's self-preferencing lowers the content quality of the non-integrated CP, but that vertical integration yields a significant increase of the integrated CP's content quality, and can result in an overall higher consumer surplus. Therefore, our results bear important implications for the regulation of digital content platforms.