User-generated content = user-generated differentiation?

We all browse on websites that contain user-generated content. As we discussed in class, a firm’s disadvantage of enabling users to generate its website’s content is the fact it has less control over their product offerings. Sometimes, this works out just fine. Firms relying on user-generated content may sometimes even acquire market positions that are not intended. For example, when Myspace, Friendster and Google’s Orkut were competing for the targeted U.S. market, Friendster became popular in Southeast Asian countries. Also, Orkut became one of the most visited websites in Brazil, India and Estonia, which are culturally complete distinct countries. The user-generated content had a key role in gaining these market positions and therefore proves to be able to let firms ‘spontaneously differentiate’ their products. The article “Differentiation with User-Generated Content” (Zhang et. al, 2015) examines the competitive implications of user-generated content.

In their first step, the writers assume firms’ offerings entirely depend on user-generated content. Consistent with previous research, when transportation cost is low (or in other words, the network effects are relatively global), the outcome typically is ‘winner-takes all’, where all consumers join a single, dominant firm. When transportation cost increases (or network effects are relatively local), ex ante identical firms can acquire horizontally differentiated market positions that spontaneously emerge from user-generated content. Moreover, this can result in patterns wherein a firm simultaneously attracts multiple distinct consumer segments that are isolated from each other, like in the Orkut example. The writers call this phenomena “segregation”. Interestingly, greater segregation also leads to smaller differentiation between platforms and increased competition. That may benefit users.

Secondly, Zhang et. al consider firms that have limited influence over their positioning: firms can generate content on their own, or take a certain target segment into consideration when designing their website features. When two firms are competing, given that their levels of advertising are fixed, the one with a smaller market share cannot compensate its users with a lower level of advertising. Therefore, consumers tend to migrate to the firm with a larger market share.

Thirdly, the writers review a model wherein consumers can join multiple websites by allocating their time between these firms. They call it multihoming and creates greater overlap between the firms’ content, because the consumer contributes to both firms’ websites. This leads to smaller product differentiation that makes coexistence more difficult and lowers profits. Thus, however tempting it is from a market share perspective, competing platforms should be careful with encouragement to join multiple platforms and share content across these platforms.

In conclusion, the writers found that with local network effects, user-generated content may trigger spontaneous differentiation among competing platforms. This may happen even if firms play an active role by designing their website especially for certain segments or generate content itself. On the other hand, hosting different segments does not automatically imply content differentiation. Ideally, content contributors build a community that is perceived as different as possible from competitors. This implies that the firm should measure differentiation based on consumer’s perception of content instead of on the number of unique content contributors.

Source: Zhang, Kaifu, and Miklos Sarvary. “Differentiation with User-Generated Content.” Management Science (2014).

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