IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v290y2021i3p927-945.html
   My bibliography  Save this article

Revenue-sharing between developers of virtual products and platform distributors

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221720307499
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2020.08.036?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Liang Guo & Tian Li & Hongtao Zhang, 2014. "Strategic Information Sharing in Competing Channels," Production and Operations Management, Production and Operations Management Society, vol. 23(10), pages 1719-1731, October.
    2. Baojun Jiang & Lin Tian & Yifan Xu & Fuqiang Zhang, 2016. "To Share or Not to Share: Demand Forecast Sharing in a Distribution Channel," Marketing Science, INFORMS, vol. 35(5), pages 800-809, September.
    3. Gerchak, Yigal & Khmelnitsky, Eugene, 2003. "A consignment system where suppliers cannot verify retailer's sales reports," International Journal of Production Economics, Elsevier, vol. 83(1), pages 37-43, January.
    4. Emek Basker (ed.), 2016. "Handbook on the Economics of Retailing and Distribution," Books, Edward Elgar Publishing, number 15905.
    5. Esther Gal-Or & Tansev Geylani & Anthony J. Dukes, 2008. "Information Sharing in a Channel with Partially Informed Retailers," Marketing Science, INFORMS, vol. 27(4), pages 642-658, 07-08.
    6. Avinadav, Tal & Chernonog, Tatyana & Perlman, Yael, 2015. "The effect of risk sensitivity on a supply chain of mobile applications under a consignment contract with revenue sharing and quality investment," International Journal of Production Economics, Elsevier, vol. 168(C), pages 31-40.
    7. Shamir, Noam, 2012. "Strategic information sharing between competing retailers in a supply chain with endogenous wholesale price," International Journal of Production Economics, Elsevier, vol. 136(2), pages 352-365.
    8. Avinadav, Tal & Chernonog, Tatyana & Perlman, Yael, 2017. "Mergers and acquisitions between risk-averse parties," European Journal of Operational Research, Elsevier, vol. 259(3), pages 926-934.
    9. Ma, Peng & Wang, Haiyan & Shang, Jennifer, 2013. "Contract design for two-stage supply chain coordination: Integrating manufacturer-quality and retailer-marketing efforts," International Journal of Production Economics, Elsevier, vol. 146(2), pages 745-755.
    10. Yigal Gerchak & Eugene Khmelnitsky & Lawrence W. Robinson, 2007. "Untruthful probabilistic demand forecasts in vendor‐managed revenue‐sharing contracts: Coordinating the chain," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(7), pages 742-749, October.
    11. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    12. Zhao, Ming & Dong, Ciwei & Cheng, T.C.E., 2018. "Quality disclosure strategies for small business enterprises in a competitive marketplace," European Journal of Operational Research, Elsevier, vol. 270(1), pages 218-229.
    13. Zhang, Juliang & Chen, Jian, 2013. "Coordination of information sharing in a supply chain," International Journal of Production Economics, Elsevier, vol. 143(1), pages 178-187.
    14. Weber, Thomas A., 2011. "Optimal Control Theory with Applications in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262015730, April.
    15. Amiya K. Chakravarty & Jun Zhang, 2007. "Collaboration in contingent capacities with information asymmetry," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(4), pages 421-432, June.
    16. Avinadav, Tal & Chernonog, Tatyana & Fruchter, Gila E. & Prasad, Ashutosh, 2020. "Contract design when quality is co-created in a supply chain," European Journal of Operational Research, Elsevier, vol. 286(3), pages 908-918.
    17. Babich, Volodymyr & Li, Hantao & Ritchken, Peter & Wang, Yunzeng, 2012. "Contracting with asymmetric demand information in supply chains," European Journal of Operational Research, Elsevier, vol. 217(2), pages 333-341.
    18. Z. Justin Ren & Morris A. Cohen & Teck H. Ho & Christian Terwiesch, 2010. "Information Sharing in a Long-Term Supply Chain Relationship: The Role of Customer Review Strategy," Operations Research, INFORMS, vol. 58(1), pages 81-93, February.
    19. R. Canan Savaskan & Shantanu Bhattacharya & Luk N. Van Wassenhove, 2004. "Closed-Loop Supply Chain Models with Product Remanufacturing," Management Science, INFORMS, vol. 50(2), pages 239-252, February.
    20. Avinadav, Tal & Henig, Mordecai I., 2015. "Exact accounting of inventory costs in stochastic periodic-review models," International Journal of Production Economics, Elsevier, vol. 169(C), pages 89-98.
    21. Aydinliyim, Tolga & Pangburn, Michael S. & Rabinovich, Elliot, 2017. "Inventory disclosure in online retailing," European Journal of Operational Research, Elsevier, vol. 261(1), pages 195-204.
    22. Avinadav, Tal & Chernonog, Tatyana & Perlman, Yael, 2014. "Analysis of protection and pricing strategies for digital products under uncertain demand," International Journal of Production Economics, Elsevier, vol. 158(C), pages 54-64.
    23. Avinadav, Tal & Chernonog, Tatyana & Perlman, Yael, 2015. "Consignment contract for mobile apps between a single retailer and competitive developers with different risk attitudes," European Journal of Operational Research, Elsevier, vol. 246(3), pages 949-957.
    24. Albert Y. Ha, 2001. "Supplier‐buyer contracting: Asymmetric cost information and cutoff level policy for buyer participation," Naval Research Logistics (NRL), John Wiley & Sons, vol. 48(1), pages 41-64, February.
    25. Noam Shamir & Hyoduk Shin, 2016. "Public Forecast Information Sharing in a Market with Competing Supply Chains," Management Science, INFORMS, vol. 62(10), pages 2994-3022, October.
    26. H. Sebastian Heese & Eda Kemahlioglu-Ziya, 2014. "Enabling Opportunism: Revenue Sharing when Sales Revenues are Unobservable," Production and Operations Management, Production and Operations Management Society, vol. 23(9), pages 1634-1645, September.
    27. Hoppe, Eva I. & Schmitz, Patrick W., 2015. "Do sellers offer menus of contracts to separate buyer types? An experimental test of adverse selection theory," Games and Economic Behavior, Elsevier, vol. 89(C), pages 17-33.
    28. Ming Zhao & Yulan Wang & Xianghua Gan, 2016. "Signalling effect of daily deal promotion for a start-up service provider," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 67(2), pages 280-293, February.
    29. Hing-Ling Lau, Amy & Lau, Hon-Shiang, 2001. "Some two-echelon style-goods inventory models with asymmetric market information," European Journal of Operational Research, Elsevier, vol. 134(1), pages 29-42, October.
    30. Xu Guan & Ying-Ju Chen, 2017. "The Interplay between Information Acquisition and Quality Disclosure," Production and Operations Management, Production and Operations Management Society, vol. 26(3), pages 389-408, March.
    31. Lau, Amy Hing Ling & Lau, Hon-Shiang & Wang, Jian-Cai, 2010. "Usefulness of resale price maintenance under different levels of sales-effort cost and system-parameter uncertainties," European Journal of Operational Research, Elsevier, vol. 203(2), pages 513-525, June.
    32. Xianghua Gan & Qi Feng & Suresh P. Sethi, 2019. "Sourcing Contract under Countervailing Incentives," Production and Operations Management, Production and Operations Management Society, vol. 28(10), pages 2486-2499, October.
    33. Avinadav, Tal & Chernonog, Tatyana & Ben-Zvi, Tal, 2019. "The effect of information superiority on a supply chain of virtual products," International Journal of Production Economics, Elsevier, vol. 216(C), pages 384-397.
    34. Chernonog, Tatyana & Avinadav, Tal & Ben-Zvi, Tal, 2015. "Pricing and sales-effort investment under bi-criteria in a supply chain of virtual products involving risk," European Journal of Operational Research, Elsevier, vol. 246(2), pages 471-475.
    35. Tatyana Chernonog & Konstantin Kogan, 2014. "The effect of risk aversion on a supply chain with postponed pricing," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 65(9), pages 1396-1411, September.
    36. Sang-Hyun Kim & Serguei Netessine, 2013. "Collaborative Cost Reduction and Component Procurement Under Information Asymmetry," Management Science, INFORMS, vol. 59(1), pages 189-206, November.
    37. Aust, Gerhard & Buscher, Udo, 2012. "Vertical cooperative advertising and pricing decisions in a manufacturer–retailer supply chain: A game-theoretic approach," European Journal of Operational Research, Elsevier, vol. 223(2), pages 473-482.
    38. Tal Avinadav, 2015. "Continuous accounting of inventory costs with Brownian-motion and Poisson demand processes," Annals of Operations Research, Springer, vol. 229(1), pages 85-102, June.
    39. Wang, Yao-Yu & Wang, Jian-Cai & Shou, Biying, 2013. "Pricing and effort investment for a newsvendor-type product," European Journal of Operational Research, Elsevier, vol. 229(2), pages 422-432.
    40. Oded Berman & Mohammad M. Fazel-Zarandi & Dmitry Krass, 2019. "Truthful Cheap Talk: Why Operational Flexibility May Lead to Truthful Communication," Management Science, INFORMS, vol. 65(4), pages 1624-1641, April.
    41. Lau, Amy Hing Ling & Lau, Hon-Shiang, 2005. "Some two-echelon supply-chain games: Improving from deterministic-symmetric-information to stochastic-asymmetric-information models," European Journal of Operational Research, Elsevier, vol. 161(1), pages 203-223, February.
    42. Wenqiang Xiao & Yi Xu, 2018. "Should an Online Retailer Penalize Its Independent Sellers for Stockout?," Production and Operations Management, Production and Operations Management Society, vol. 27(6), pages 1124-1132, June.
    43. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    44. Chu, Wai Hung Julius & Lee, Ching Chyi, 2006. "Strategic information sharing in a supply chain," European Journal of Operational Research, Elsevier, vol. 174(3), pages 1567-1579, November.
    45. Baojun Jiang & Kinshuk Jerath & Kannan Srinivasan, 2011. "Firm Strategies in the "Mid Tail" of Platform-Based Retailing," Marketing Science, INFORMS, vol. 30(5), pages 757-775, September.
    46. Chernonog, Tatyana & Avinadav, Tal, 2014. "Profit criteria involving risk in price setting of virtual products," European Journal of Operational Research, Elsevier, vol. 236(1), pages 351-360.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Janek Meyn & Michael Kandziora & Sönke Albers & Michel Clement, 2023. "Consequences of platforms' remuneration models for digital content: initial evidence and a research agenda for streaming services," Journal of the Academy of Marketing Science, Springer, vol. 51(1), pages 114-131, January.
    2. 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.
    3. Avinadav, Tal & Levy, Priel, 2023. "The effect of an uncertain commission rate on the decisions of a capital-constrained developer," Operations Research Perspectives, Elsevier, vol. 11(C).
    4. Yaxin Wang & Haoyu Wen & ZhongQuan Hu & Yuntao Zhang, 2023. "Collaborative Innovation Strategy of Supply Chain in the Context of MCU Domestic Substitution : A Differential Game Analysis," Computational Economics, Springer;Society for Computational Economics, vol. 61(3), pages 1039-1074, March.
    5. Avinadav, Tal & Levy, Priel, 2024. "Improving efficiency in supply chains with a capital-constrained app developer under the agency contract," European Journal of Operational Research, Elsevier, vol. 315(3), pages 991-1005.
    6. Sangita Poddar & Tanmoyee Banerjee(Chatterjee) & Swapnendu Banerjee, 2023. "Taxation on duopoly e-commerce platforms and their search environments," SN Business & Economics, Springer, vol. 3(8), pages 1-20, August.
    7. 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).
    8. Tian, Longmei & Hu, Benyong, 2023. "The impacts of blockchain adoption on pricing and efforts decisions in online game supply chains with information asymmetry," International Journal of Production Economics, Elsevier, vol. 266(C).
    9. 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.
    10. Avinadav, Tal & Chernonog, Tatyana & Meilijson, Isaac & Perlman, Yael, 2022. "A consignment contract with revenue sharing between an app developer and a distribution platform," International Journal of Production Economics, Elsevier, vol. 243(C).
    11. Xiaotong Guo & Yong He, 2022. "Mathematical Modeling and Optimization of Platform Service Supply Chains: A Literature Review," Mathematics, MDPI, vol. 10(22), pages 1-19, November.
    12. Ma, Xiaoyu & Huang, Feiteng & Li, Xue & Zhang, Jihong, 2024. "Optimal contract design in mobile service industry considering network congestion," International Journal of Production Economics, Elsevier, vol. 267(C).
    13. Xia, Lulu & Li, Kai & Fu, Hong, 2024. "Bargaining in mobile app supply chain considering members’ fairness concern attitudes," International Journal of Production Economics, Elsevier, vol. 270(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Avinadav, Tal & Chernonog, Tatyana & Ben-Zvi, Tal, 2019. "The effect of information superiority on a supply chain of virtual products," International Journal of Production Economics, Elsevier, vol. 216(C), pages 384-397.
    2. 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).
    3. Avinadav, Tal & Chernonog, Tatyana & Meilijson, Isaac & Perlman, Yael, 2022. "A consignment contract with revenue sharing between an app developer and a distribution platform," International Journal of Production Economics, Elsevier, vol. 243(C).
    4. Chernonog, Tatyana & Avinadav, Tal, 2019. "Pricing and advertising in a supply chain of perishable products under asymmetric information," International Journal of Production Economics, Elsevier, vol. 209(C), pages 249-264.
    5. Tatyana Chernonog, 2021. "Strategic information sharing in online retailing under a consignment contract with revenue sharing," Annals of Operations Research, Springer, vol. 300(2), pages 621-641, May.
    6. Avinadav, Tal, 2020. "The effect of decision rights allocation on a supply chain of perishable products under a revenue-sharing contract," International Journal of Production Economics, Elsevier, vol. 225(C).
    7. Avinadav, Tal & Shamir, Noam, 2021. "The effect of information asymmetry on ordering and capacity decisions in supply chains," European Journal of Operational Research, Elsevier, vol. 292(2), pages 562-578.
    8. Avinadav, Tal & Chernonog, Tatyana & Fruchter, Gila E. & Prasad, Ashutosh, 2020. "Contract design when quality is co-created in a supply chain," European Journal of Operational Research, Elsevier, vol. 286(3), pages 908-918.
    9. Chernonog, Tatyana & Avinadav, Tal & Ben-Zvi, Tal, 2019. "How to set price and quality in a supply chain of virtual products under bi-criteria and risk consideration," International Journal of Production Economics, Elsevier, vol. 209(C), pages 156-163.
    10. Avinadav, Tal & Levy, Priel, 2024. "Improving efficiency in supply chains with a capital-constrained app developer under the agency contract," European Journal of Operational Research, Elsevier, vol. 315(3), pages 991-1005.
    11. Chernonog, Tatyana, 2020. "Inventory and marketing policy in a supply chain of a perishable product," International Journal of Production Economics, Elsevier, vol. 219(C), pages 259-274.
    12. Jiang, Zhong-Zhong & Zhao, Jinlong & Zhang, Yinghao & Yi, Zelong, 2022. "Unraveling the cheap talk’s informativeness of product quality in supply chains: A lying aversion perspective," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 166(C).
    13. Avinadav, Tal & Levy, Priel, 2023. "The effect of an uncertain commission rate on the decisions of a capital-constrained developer," Operations Research Perspectives, Elsevier, vol. 11(C).
    14. 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.
    15. Song Huang & Shuting Chen & Lei Xiao, 2020. "Manufacturer product quality information disclosure with channel encroachment in the E‐commerce age," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(5), pages 744-761, July.
    16. Shi, Jia & Chu, Lap Keung & Luo, Huajiang, 2023. "Voluntary information disclosure of an e-commerce platform under reselling, marketplace, and hybrid selling," International Journal of Production Economics, Elsevier, vol. 265(C).
    17. Tian, Longmei & Hu, Benyong, 2023. "The impacts of blockchain adoption on pricing and efforts decisions in online game supply chains with information asymmetry," International Journal of Production Economics, Elsevier, vol. 266(C).
    18. Zhang, Jian & Nault, Barrie R., 2023. "Information sharing in an MTO supply chain with upstream adjustments," European Journal of Operational Research, Elsevier, vol. 308(1), pages 97-112.
    19. Chernonog, Tatyana & Avinadav, Tal & Ben-Zvi, Tal, 2015. "Pricing and sales-effort investment under bi-criteria in a supply chain of virtual products involving risk," European Journal of Operational Research, Elsevier, vol. 246(2), pages 471-475.
    20. Noam Shamir & Hyoduk Shin, 2016. "Public Forecast Information Sharing in a Market with Competing Supply Chains," Management Science, INFORMS, vol. 62(10), pages 2994-3022, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:290:y:2021:i:3:p:927-945. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.