Optimal Contract Under Endogenous Platform Services: Implications of Tax and Advertising

Abstract

The paper evaluates the contracting problem between a platform and a seller under information asymmetry where the seller holds private information about his/her cost for product quality. Price per product is influenced by seller’s product quality and platform’s service quality. Cost-sharing contract is more desirable as it induces a higher level of qualities and generates higher profit for the platform compared to revenue-sharing contract. The product quality and platform’s service quality vary negatively with the ad-valorem tax imposed on price of the product. We then introduce advertising in our model and observe that the level of advertising is lower under information asymmetry. JEL Classification: D86, L21, M37