The optimal design of skill-based consumer contests in the context of online entertainment

This dissertation looks at several issues in designing an optimal skill-based consumer contest (SBCC). Consumer product (or service) companies, such as online entertainment providers, often use SBCCs to promote the consumption of their products (or services). The main objective of a SBCC is to maximize the profit from the enhanced consumption by consumers rather than their outcome in the contest. This research is the first to investigate design issues in contests of this kind. The first part of the dissertation explores the role of SBCCs in online entertainment area by focusing on the status-seeking behavior of human beings. Drawing from psychology literature, I argue that the desire for status provides a strong motive for consumers to compete with each other in online entertainment communities. In the second part of the dissertation, I build a game-theoretical model to study a handful of design issues arising from the SBCCs. In this framework, a monopoly firm faces n consumers who may differ in skill levels. The firm offers a set of prizes to consumers in a SBCC that requires two inputs: skill and consumption. One of the main findings in this research is that a Winner-Take-All prize structure is often optimal (but not always) for the SBCCs. Another finding is that consumers will compete more aggressively when their skill levels are closer to each other. As a result, the firm may be better off by segmenting consumers based on their skill levels. In addition, in some cases, the firm is better off by charging an entry fee to exclude low-skilled consumers. These findings contribute to existing literature on contest designs and provide practical guidelines for structuring a SBCC. The last part of the dissertation empirically analyzes two individual-level datasets from a wireless game to verify the insights obtained from the theoretical model.