A Mobile Platform's In‐App Advertising Contract Under Agency Pricing for App Sales

TLDR

Unlike traditional media, a mobile platform’s in‑app advertising market is characterized by a split structure between platform owners and app developers and by agency pricing for app sales. The authors develop a two‑sided market model to analyze how these features influence the platform owner’s optimal advertising revenue‑sharing contract. The model examines the role of the split structure and agency pricing in determining the optimal ad revenue share. The analysis reveals an N‑shaped relationship between overall advertiser valuation and the platform owner’s optimal ad revenue share, shows that subsidizing developers via advertising raises profits for both parties, and indicates that the agency‑pricing contract leads to higher app prices than an integrated platform while aligning the platform owner’s and developer’s interests on ad pricing.

Abstract

Unlike advertising in traditional media, a mobile platform's in‐app advertising market exhibits two unique features—split structure of the mobile platform with a platform owner and an app developer jointly provisioning in‐app advertising, and agency pricing for app sales. We develop a two‐sided market model to analyze the role of these two unique features in determining the platform owner's optimal advertising revenue‐sharing contract. Our results reveal an interesting N‐shaped dynamic regarding the platform owner's optimal choice of her ad revenue share with respect to the overall advertisers’ valuation of in‐app ads. We identify a between‐agent subsidization strategy for the platform owner, where she finds it optimal to subsidize the developer via the advertising channel, leading to greater profits for both of them. We find that the advertising revenue‐sharing contract under agency pricing for app sales leads to a higher app price than would be offered by the integrated platform found in traditional advertising. However, the ad price is coordinated under the platform owner's optimal choice of ad revenue share when she obtains revenue from both the advertising and app sales channels, leading to an alignment of her interest with the app developer's on ad level.