The effect of risk sensitivity on a supply chain of mobile applications under a consignment contract with revenue sharing and quality investment

Abstract

The paper provides a thorough investigation of the revenue sharing contract format typically used in the mobile applications (Apps) industry. The platform provider sets the level of revenue sharing, and the App developer determines the investment in quality and the selling price of the App. The demand for an App, which depends on both price and quality investment, is assumed to be uncertain, so the risk attitude of the supply chain members has to be considered. Specifically, we focus on how risk-sensitive behavior of supply chain members affects chain performance. The members’ equilibrium strategies are analyzed under different attitudes toward risk: averse, neutral and seeking. We show that the retailer’s utility function has no effect on the equilibrium strategies, and suggest schemes to identify these strategies for any utility function of the developer. We find that (i) the revenue sharing contract circumvents the double marginalization effect associated with vertical competition and therefore yields the best selling price for the customer; (ii) a decentralized supply chain sometimes performs better than a centralized one; and (iii) a risk-seeking developer may obtain a higher expected profit than does a risk-neutral developer.