Economics of Digitization Munich, 19–20 November 2020
Economics of Digitization Munich, 19–20 November 2020 User-generated content, strategic moderation, and advertising Leonardo Madio and Martin Quinn User-generated content, strategic moderation, and advertising∗ Leonardo Madio1† Martin Quinn2,‡ 1University of Padova, 2Católica Lisbon School of Business & Economics. This Version: November 2020 Social networks act as “attention brokers” and stimulate the production of user-generated content to increase user activity on a platform. When ads are displayed in unsuitable environments (e.g., disputed material), advertisers may face a backlash. This article studies the incentive for an ad-funded platform to invest in content moderation and its impact on market outcome. We find that if moderation costs are sufficiently small (large), the ad price is U-shaped (decreasing) in brand risks and the optimal content moderation always increases (is inverted U-shaped). When platforms compete for user attention, content moderation decreases as competition intensifies and this constitutes a market failure. Finally, well-intended policy measures, such as taxation of platform ad revenues, alter incentives to invest in content moderation and this might lead to the spread of harmful content. Keywords: Advertising; content moderation; user-generated content; platforms. JEL Classification: L82; L86; M3. ∗The authors thank Luis Abreu, Malin Arve, Luca Ferrari, David Henriques, Laurent Linnemer, Christian Peukert, Carlo Reggiani, Patrick Waelbroeck for helpful comments on a previous draft. We are also grateful to seminar participants in Lisbon, Paris Saclay, Telecom ParisTech, UK OFCOM, at the Workshop on Platforms E-commerce and Digital Economics (CREST, 2019), at the Conference on Auctions, Competition, Regulation, and Public Policy (Lancaster, 2019), the 17th ZEW ICT Conference (Mannheim, 2019), the EARIE (Barcelona, 2019), the Giorgio Rota Best Paper Award Conference (Centro Einaudi, Turin, 2020), online SIEP Conference (2020).
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