A consignment contract with revenue sharing between an app developer and a distribution platform

Abstract

Distribution platforms use a consignment contract with revenue sharing when interacting with their app developers. In such a contract, the developer continues to own the app and typically bears sole responsibility for determining its selling price, where for every app sold, the platform charges the developer an agreed-upon percentage of the selling price. The developers and the platforms receive signals (private information) correlated with the uncertain demand, resulting in information asymmetry. Nash equilibrium in pure strategies is shown to exist only if the platform, which moves first by offering the contract terms, discloses its signal or has no signal at all. Two significant findings are obtained: (i) The platform derives no benefit from the knowledge of the developer's signal but benefits when the developer possesses the platform's signal. This result is supported by real-practice applications in which platforms propose sharing their information with developers (e.g., Firebase by Google and App-Analytics by Apple). (ii) The platform is better off if it obtains a signal from a source of information unrelated to that of the developer (e.g., using different forecasting methodologies). The novelty of this study is that it performs revenue-sharing analysis without the common assumption of multivariate normal demand/signals, providing a general Proof that the follower cannot infer the leader's signal about the base demand. The analysis is extended to the case of a risk-averse app developer and multiplicative form of demand uncertainty.