User-Generated Content Platforms: Managing the Relationship Triangle

Problem definition: In the user-generated content (UGC) business model, the platform provides income for the creators, the creators provide content for the viewers, and the viewers provide advertising revenue for the platform, forming a relationship triangle. We set out to study a UGC platform’s optimal dynamic operational policies in its different stages and the impact of various constraints and innovations. Methodology/results: We adopt a hybrid of the Bass diffusion model and the replicator equation in evolutionary game theory to capture the creator and viewer base growths and analyze the dynamic operational decisions of a UGC platform, including promotion, advertising, and revenue sharing in an optimal control framework. We find an interesting mirroring structure between the platform’s early- and mature-stage optimal advertising and creator wage policies. An analysis of the optimal policies reveals a coherent rationale behind the dynamic management of the UGC platform around the relationship triangle. We also show that the platform should generously share advertising revenue with creators and may adopt loss leading shortly after as opposed to right at launch. We further explore the impacts of celebrity creators, liquidity constraints, paid advertisement removal, sponsored content, and viewer tipping. Managerial implications: Our findings are instructive for the dynamic management of UGC platforms and highlight the unique characteristics of this business model.