Differentiation with User-Generated Content

Social Media Competition: Differentiation with User-Generated Content

This paper studies competition between social media sites in a game theoretic framework. We model three important institutional features of social media sites: (i) firms’ content is usually “user-generated”; (ii) consumers’ preferences are governed by local network effects, and (iii) consumers have strong tendencies to multi-home. In such a setting, ex-ante identical sites can acquire differentiated market positions that spontaneously emerge from user-generated content. Furthermore, sites may obtain unanticipated and sometimes ambiguous market positions, wherein one site simultaneously attracts multiple distinct consumer segments that are isolated from each other. The degree of “spontaneous differentiation” increases with the localness of network effects. Spontaneous differentiation increases firms’ profits but may imply too much consumer segregation and lower social welfare. In most equilibria, a subset of consumers multi-home. Interestingly, more multi-homing consumers imply reduced differentiation and higher site competition. In an extension, we examine the case where firms explicitly position their sites by designing website features. We find that user-generated content can either enhance or override the sites’ positioning decisions, leading to interesting situations where sites acquire ‘unintended’ market positions. Our findings shed light on a few stylized facts related to the rapid evolution of the social media industry and also highlight the incentives of competing industry players.

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