Impact of Market Structure on Regulatory Compliance: Evidence from Online Censorship in China

Abstract

This paper studies the role of market structure in regulatory compliance through a unique empirical example: censorship via content removal by three major live-streaming platforms in China. Adopting an event study approach, this paper exploits the unexpected occurrence of 30 salient events over two years and shows that platforms of different sizes censor a different number of keywords with notably different delays. This paper then develops and estimates a structural model where the platform’s profit depends on its own censorship action as well as that of its competitors, induced by the switching behavior of users with heterogeneous preferences for censorship. By complying with the government’s censorship request, platforms may lose users who prefer to evade censorship by switching out. By not complying, platforms incur a cost imposed by the government that is positively correlated with their sizes, but it also allows them to attract new users from their competitors that obey the government’s censorship requests. My counterfactual analysis predicts that centralizing market power via merging or shutting down small platforms could backfire and lead to an unintended consequence where the overall censorship in the marketplace turns out to be lower.