Coordination of a Decentralized System with a Mobile Platform and an App by a Bilateral Advertising Contract

Abstract

A previous study investigates the advertising strategies of the platform and App by assuming that the platform’s advertisement will increase the number of the App’s users, but the App’s advertisement will not increase the number of the platform’s users; and the platform overcharges the App and takes the advertising fee as a source of its revenue. However, the existing users of the App may recommend the App to the users who have not used it. As a result, the App’s advertisement may increase the number of the platform’s users. Additionally, it is not reasonable that the platform takes the advertising fee of the App as a source of its revenue. These motivate us to reanalyze the previous work. This paper reanalyzes the previous work by additionally assuming that the App’s advertisement will increase the number of the platform’s users and assuming that the platform receives its revenue from its users and shares a proportion of the App’s sales revenue and the App receives its revenues from its users and a proportion of its advertising cost subsidized by the platform. We find that these new assumptions have some significant effects on the previous results. We use dynamical optimization approaches to analyze a decentralized system and find the two parties’ optimal advertisement efforts and proportions. To achieve the efficiency of the integrated system that is proved to be more efficient than the decentralized system, we design a bilateral advertising contact for the decentralized system and show that there exists a unique contact that can coordinate the decentralized system. We find that both parties are better off under some mild conditions and the proportion that the platform bears the App’s advertising cost becomes greater with the contract than without the contract. We have gained some managerial insights.