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Optimal Advertorial Allocation and Contract Design of a Multichannel Networks Company on Video Sharing
Platforms

4.3 MCN Company’s Advertorial Allocation under Structure I
The final part of our analysis is on the advertorial allocation decision. Unfortunately,
due to the great complexity of the problem, we are unable to derive the optimal advertorial
allocation proportion x in a closed-form expression. We thus resort to extensive numerical
I
studies to observe the impact of adjusting the proportion.
I
Our first finding is that if γ ≠ 0, the optimal proportion x may be 1, between 0 and
1, but is never 0. In other words, while it is possible to allocate all the advertorial fee to

the high-type creator or split the fee for both creators, the MCN company should never
allocate all the advertorial to the low-type creator when both of the two revenue sources
(advertising revenue from a video sharing platform and advertorial fee revenue from a
business owner) exist. This is because the ability of low-type creator is weaker than the
high-type one, and if the MCN company finds it optimal to put all its resources to one
single creator, it is better to delegate to the stronger one, leaving the weaker one to focus
on advertising revenue that does not require a threshold.

We also examine the effect of the following exogenous variables to the MCN
company’s allocation decision. First, we are particularly interested in whether the MCN
company should adopt the splitting strategy, which gives the advertorial fee to the two
creators separately, or the focusing strategy, which allocates resource only to the high-
type creator. Figure 5 depicts the relationship between the two creators’ abilities and the
optimal allocation strategy, where the horizontal and vertical axes are the high-type and
low-type creators’ abilities, respectively. It shows that the splitting strategy is optimal if
and only if the abilities of these two creators are close enough. This is because when the
low-type creator is too weak compared with the high-type one, allocating any resource to

her/him is inefficient.
Regarding the production cost, the idea is roughly the same. When the cost is quite
high, allocating anything to the low-type creator has a tiny effect on increasing the effort
level. When the cost is quite low, allocating everything to the high-type creator is good
enough. The splitting strategy is optimal if and only if the cost is neither too high nor too
low.
Figure 6 depicts the relationship between the amount of advertorial, the cost of

producing videos, and the optimal allocation strategy. It may be observed that the splitting
strategy is optimal if any of the two factors are moderate, while the focusing strategy is
optimal if any of them are extreme. Consider the advertorial fee first. When the fee is too
small, splitting it will make each part too small to incentivize any creator. On the contrary,

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