Optimal contract design in mobile service industry considering network congestion

Abstract

In this paper, we study how to design the optimal contract in the mobile service industry, which has two main features. First, both the mobile service provider and the sales agent can generate profit from the customers, and the service revenue is mainly generated by the service provider. Second, the congestion effect arises when the total usage exceeds the threshold and hence customer satisfaction decreases. Therefore, it is important for the service provider to ask how to attract new customers and motivate the agent properly. Drawing inspiration from the practices observed in the mobile service industry, we develop a theoretical framework that considers a mobile service chain which involves a service provider selling various types of SIM cards through a sales agent, operating under a revenue sharing contract that specifies the distribution of revenues between the two parties. Comparing the equilibrium outcomes of this novel revenue sharing contract with those of the traditional wholesale price contract, we demonstrate that the mutual benefits can be derived from the novel revenue sharing contract. Our proposed contract design can facilitate the supply chain coordination and yield Pareto Improvement. To further substantiate our findings, we conduct an empirical experiment using the real-world data obtained from a prominent mobile service firm. The results reveal that our novel contract design can enhance the total profits of the mobile service chain by a noteworthy 21.47%. Our findings provide guidelines for practitioners in the mobile service industry on designing optimal contracts and incentivizing the supply chain members.