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A Mobile Platform's In‐App Advertising Contract Under Agency Pricing for App Sales

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  • Lin Hao
  • Hong Guo
  • Robert F. Easley

Abstract

Unlike advertising in traditional media, a mobile platform's in‐app advertising market exhibits two unique features—split structure of the mobile platform with a platform owner and an app developer jointly provisioning in‐app advertising, and agency pricing for app sales. We develop a two‐sided market model to analyze the role of these two unique features in determining the platform owner's optimal advertising revenue‐sharing contract. Our results reveal an interesting N‐shaped dynamic regarding the platform owner's optimal choice of her ad revenue share with respect to the overall advertisers’ valuation of in‐app ads. We identify a between‐agent subsidization strategy for the platform owner, where she finds it optimal to subsidize the developer via the advertising channel, leading to greater profits for both of them. We find that the advertising revenue‐sharing contract under agency pricing for app sales leads to a higher app price than would be offered by the integrated platform found in traditional advertising. However, the ad price is coordinated under the platform owner's optimal choice of ad revenue share when she obtains revenue from both the advertising and app sales channels, leading to an alignment of her interest with the app developer's on ad level.

Suggested Citation

  • Lin Hao & Hong Guo & Robert F. Easley, 2017. "A Mobile Platform's In‐App Advertising Contract Under Agency Pricing for App Sales," Production and Operations Management, Production and Operations Management Society, vol. 26(2), pages 189-202, February.
    • Handle: RePEc:bla:popmgt:v:26:y:2017:i:2:p:189-202
    DOI: 10.1111/poms.12647
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    Cited by:

    1. Subodha Kumar & Xiaowei Mei & Liangfei Qiu & Lai Wei, 2020. "Watching Ads for Free Mobile Data: A Game-Theoretic Analysis of Sponsored Data with Reward Task," Working Papers 20-08, NET Institute.
    2. Mei Lin & Xiajun Amy Pan & Quan Zheng, 2020. "Platform Pricing with Strategic Buyers: The Impact of Future Production Cost," Production and Operations Management, Production and Operations Management Society, vol. 29(5), pages 1122-1144, May.
    3. Avinadav, Tal & Levy, Priel, 2022. "Value of information in a mobile app supply chain under hidden or known information superiority," International Journal of Production Economics, Elsevier, vol. 248(C).
    4. Peng, Shuxia & Li, Bo & Wu, Shuang, 2023. "Presence of piracy and legal protection: Decisions in the digital goods market under different contracts," European Journal of Operational Research, Elsevier, vol. 309(2), pages 578-596.
    5. Haoyu Liu & Shulin Liu, 2020. "Research on Advertising and Quality of Paid Apps, Considering the Effects of Reference Price and Goodwill," Mathematics, MDPI, vol. 8(5), pages 1-23, May.
    6. Sulin Ba & Shu He & Shun‐Yang Lee, 2022. "Mobile App Adoption and Its Differential Impact on Consumer Shopping Behavior," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 764-780, February.
    7. Chen, Yuwen & Ni, John & Yu, Degan, 2019. "Application developers’ product offering strategies in multi-platform markets," European Journal of Operational Research, Elsevier, vol. 273(1), pages 320-333.
    8. I. Robert Chiang & Jhih‐Hua Jhang‐Li, 2020. "Competition through Exclusivity in Digital Content Distribution," Production and Operations Management, Production and Operations Management Society, vol. 29(5), pages 1270-1286, May.
    9. Haoyu Liu & Shulin Liu, 2019. "Considering In-App Advertising Mode, Platform-App Channel Coordination by a Sustainable Cooperative Advertising Mechanism," Sustainability, MDPI, vol. 12(1), pages 1-28, December.
    10. Mariia Petryk & Michael Rivera & Siddharth Bhattacharya & Liangfei Qiu & Subodha Kumar, 2022. "How Network Embeddedness Affects Real-Time Performance Feedback: An Empirical Investigation," Information Systems Research, INFORMS, vol. 33(4), pages 1467-1489, December.
    11. Yongyi Zhou & Yulin Zhang & Mark Goh, 2021. "Choice of pricing and advertising schemes for a two‐sided platform," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1865-1885, October.
    12. Xiaojing Li & Xingzheng Ai, 2021. "A choice of selling format in the online marketplace with cross-sales supply chain: Platform selling or traditional reselling?," Electronic Commerce Research, Springer, vol. 21(2), pages 393-422, June.
    13. Xu, Xiaoping & He, Ping & Zhang, Shanshan, 2021. "Channel addition from marketplace or reselling under regional carbon cap-and-trade regulation," International Journal of Production Economics, Elsevier, vol. 236(C).
    14. Xingyue Zhang & Yuliang Yao, 2020. "How Much is Too Much? The Effect of Offline Call Intensity on Online Purchase of Digital Services," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 509-525, March.
    15. Chernonog, Tatyana & Levy, Priel, 2023. "Co-creation of mobile app quality in a two-platform supply chain when platforms are asymmetric," European Journal of Operational Research, Elsevier, vol. 308(1), pages 183-200.
    16. Liu, Weihua & Yan, Xiaoyu & Wei, Wanying & Xie, Dong, 2019. "Pricing decisions for service platform with provider’s threshold participating quantity, value-added service and matching ability," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 122(C), pages 410-432.
    17. Lin Hao & Yong Tan, 2019. "Who Wants Consumers to Be Informed? Facilitating Information Disclosure in a Distribution Channel," Service Science, INFORMS, vol. 30(1), pages 34-49, March.
    18. Subodha Kumar & Yinliang (Ricky) Tan & Lai Wei, 2020. "When to Play Your Advertisement? Optimal Insertion Policy of Behavioral Advertisement," Information Systems Research, INFORMS, vol. 31(2), pages 589-606, June.
    19. Feng, Yixuan & Tan, Yinliang (Ricky) & Duan, Yongrui & Bai, Yu, 2020. "Strategies analysis of luxury fashion rental platform in sharing economy," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 142(C).
    20. Ron Adner & Jianqing Chen & Feng Zhu, 2020. "Frenemies in Platform Markets: Heterogeneous Profit Foci as Drivers of Compatibility Decisions," Management Science, INFORMS, vol. 66(6), pages 2432-2451, June.
    21. Yuan Fang & Bin Shen & Yifan Cao, 2022. "To Share or Not to Share? The Optimal Technology Investment in a Virtual Product Supply Chain," Sustainability, MDPI, vol. 14(19), pages 1-30, October.
    22. Xu, Xiaoping & Guo, Shunan & Cheng, T.C.E. & Du, Pengcheng, 2023. "The choice between the agency and reselling modes considering green technology with the cap-and-trade scheme," International Journal of Production Economics, Elsevier, vol. 260(C).

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