Counteracting quality deterioration on content platforms with two-tier revenue sharing under market uncertainty

The traditional revenue-sharing (RS) policy allows platforms to extract the same proportion of revenue regardless of market conditions. Therefore, when the market is poor, creators’ retained revenue may not cover costs, leading them to reduce content quality. To incentivize creators to produce high-quality content, some platforms have decided to give up revenue below a given threshold through an incentive plan named two-tier revenue sharing (TRS). Under TRS, the platform sets a threshold value for charging commissions (the non-sharing threshold) such that the platform only takes a cut of the creators’ revenue above that threshold. We develop a game-theoretic model to study the platform’s policy choice-whether to adopt TRS and how to set the threshold-and the creator’s quality decision. Results show that when the platform cannot adjust the sharing ratio, he prefers TRS when the exogenous ratio (determined by the industry standard) is sufficiently small and the market uncertainty is high. The reason is that TRS can alleviate the creator’s concern about market uncertainty since it can protect the creator’s profit when the content is unpopular. When the platform can adjust the sharing ratio, TRS reduces the platform’s profit even though it sometimes improves the quality of content. Surprisingly, a higher probability of favorable market condition does not necessarily raise the platform’s expected profit under TRS. Moreover, creators may suffer in good markets if the platform switches from TRS to RS. These findings guide managers on adopting and designing TRS, emphasizing its benefits and trade-offs.