Research on Advertising and Quality of Paid Apps, Considering the Effects of Reference Price and Goodwill

Abstract

Considering users’ perceptions can help managers develop more accurate business strategies. Utilizing optimal control theory, this paper takes the reference price and goodwill of paid App as the state variables to analyze the paid App’s optimal product quality and the platform’s optimal advertising effort with the revenue-sharing contract in the decentralized and integrated systems, respectively. Results show that: (1) The higher the users’ loyalty, the higher the reference price, while for the users who lack loyalty, the impact of reference price can be ignored. (2) When the revenue-sharing rate is equal to or more than 2/3, the paid App is unwilling to bear any advertising costs for the platform. (3) We propose a bilateral subsidy agreement to coordinate the decentralized system smoothly and implement the optimal objective of the integrated system. (4) Importantly, under some mild conditions, we prove that the platform and paid App can both benefit from the agreement.