You Get What You Pay For! An Economic Analysis of the Impact of Data Sponsorship on Content Production

The mechanism for data traffic pricing critically impacts the content provision decisions of data-intensive applications. We analyze the implications of sponsored data services on content quality, the profits of content providers (CPs) and Internet service providers (ISPs), consumer surplus, and social welfare using a game-theoretical model. By endogenizing CPs’ content quality decisions, our study reveals the critical role of content production efficiency in determining the optimal mechanism for ISPs’ data traffic pricing. When content production efficiency is low, allowing sponsored data services increases an ISP’s profit but adversely affects CPs by intensifying competition to subsidize consumers, consistent with prior studies. When content production efficiency is high, data sponsorship reduces the ISP’s profit but benefits CPs by dampening the intensity of competition in content production. Regarding consumer surplus and social welfare, when content production efficiency is sufficiently high, allowing only one CP to sponsor consumers maximizes consumer surplus and social welfare compared with scenarios with no data sponsorship or with both CPs allowed to sponsor consumers. As technology such as generative artificial intelligence tools enhances content production, ISPs and governments should re-evaluate data sponsorship programs.