Improving efficiency in supply chains with a capital-constrained app developer under the agency contract

Abstract

We investigate a supply-chain model with a capital-constrained app developer. The developer interacts with a distribution platform via an agency contract, and the demand is uncertain and dependent on the app’s quality level and selling price. Given the amount of capital that the developer commits to investing in the creation of quality, the platform offers the developer a loan at a certain interest rate, based on which the developer determines the app’s quality level and subsequently also the selling price. We analytically prove that: (i) the interest rate offered by the platform decreases in the developer’s capital and, interestingly, the platform subsidizes the developer’s efforts either when the platform’s share of the revenue or the developer’s capital are sufficiently large; (ii) there is an amount of capital assigned to the creation of quality that is optimal in terms of maximizing the developer’s expected profit; and (iii) the total channel’s expected profit increases in the developer’s capital, which enables us to propose an improved contract leading to Pareto improvement and full coordination by using a side payment that compensates the developer for his loss of profit. In addition, we compare the supply-chain measures of the platform-financing model with those of four common benchmark models: a self-financing developer, a centralized system, no financing, and bank financing. Finally, we extend the analysis in three directions: setting price under demand uncertainty; analyzing a multiplicative demand form with regard to price and quality; and exploring the case of bank financing in addition to platform financing.