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Revenue-sharing between developers of virtual products and platform distributors

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  • Avinadav, Tal
  • Chernonog, Tatyana
  • Khmelnitsky, Eugene

Abstract

We investigate consignment contracts with revenue-sharing for selling virtual products subject to information asymmetry. In practice, distribution platforms commonly use unified contracts with identical revenue-sharing terms across the developers whose products they offer. We analyze the case of a developer who is better informed than his distribution platform regarding the demand. First, we prove that the developer has no incentive to voluntarily disclose his private information and that cheap-talk is not informative, so the distribution platform can either extract this information by designing a revelation mechanism via a menu of contracts or propose a less complicated, suboptimal but commonly used unified contract. Based on optimal control theory, we develop a menu of contracts over a continuous demand domain, which includes a mechanism that leaves out some developers who reduce the expected profit of the distribution platform. We find that (i) the distribution platform is willing to share the developer's cost to make the developer act in accordance with the actual base demand; (ii) the menu of contracts is more supportive of small businesses than the unified contract; and (iii) the menu of contracts can significantly improve the distribution platform's expected profit compared with that of the unified contract when the app quality exceeds the minimum required level. In addition, we develop a mathematical model for the case of an app developer who has the option of bypassing the distribution platform and selling his app directly to end consumers, although he would then face a smaller market.

Suggested Citation

  • Avinadav, Tal & Chernonog, Tatyana & Khmelnitsky, Eugene, 2021. "Revenue-sharing between developers of virtual products and platform distributors," European Journal of Operational Research, Elsevier, vol. 290(3), pages 927-945.
  • Handle: RePEc:eee:ejores:v:290:y:2021:i:3:p:927-945
    DOI: 10.1016/j.ejor.2020.08.036
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