Mobile Platforms

Mobile platforms have enabled many technological and business innovations such as reward advertising, mobile service contracts, in-app advertising contracts, etc.

Reward advertising is an emerging monetization mechanism for app developers. With reward ads, consumers have an option to view ads in exchange for a reward such as premium content. Guo et al. (2017) investigate when and how an app developer should adopt reward ads as a mechanism for monetizing content. We identify two determinants – the revenue rate of the ads and the heterogeneity of consumers’ nuisance costs of viewing ads. When the ad revenue rate is low relative to consumers’ nuisance cost, the app developer should rely on content selling and not offer reward ads (i.e., the pure content-selling strategy). Otherwise, it is profitable for the app developer to offer reward ads alone (the pure reward-advertising strategy) or in combination with content selling (the hybrid strategy). When reward ads are offered, the hybrid strategy is more profitable if consumers are highly heterogeneous in nuisance costs; otherwise, the pure reward-advertising strategy is more profitable. Interestingly, we find that a high reward rate could decrease the number of reward ads viewed due to accelerated satiation. The optimal reward rate for the pure reward-advertising strategy may increase or decrease in consumers’ nuisance cost heterogeneity. Furthermore, when the proportion of low-nuisance-cost consumers is high enough, the total consumer surplus under the pure reward-advertising strategy is lower than those under the other two strategies. Our results provide practical guidance for app developers on when to use reward advertising, how to choose optimal rewards rates, and what to expect about its impact on consumers.

Mobile carriers used to enforce service contracts on consumers. However, recently major mobile carriers have eliminated contracts. Zhao et al. (2017) investigate carriers’ contract and marketing strategies. We identify Expectation-Reality Discrepancy (ERD) as a key determinant. A carrier’s ERD is defined as consumers’ ex-ante expected valuation minus their ex-post realized valuation of the carrier’s service. Main findings include: Carriers’ contract strategies critically depend on their ERDs rather than the true service valuations. A carrier with a higher ERD is more likely to enforce contracts, regardless of whether the true service valuation is higher than that of her competitor. Carriers should enforce contracts only when they have positive ERDs. When both carriers have positive ERDs, cross switching occurs, resulting in that some consumers located closer to a carrier switch to the other carrier and vice versa. Contracts have the competition-intensifying effect. When carriers enforce contracts, their competition on promoting consumer expectations is intensified, leading to higher ERDs with contracts than without contracts. Finally, both contracts and positive ERD marketing strategies hurt consumer welfare.

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. In Hao et al. (2017), 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.

References:

Hong Guo, Xuying Zhao, Lin Hao, and De Liu. 2017. “Economic analysis of reward advertising,” Working paper. SSRN

Xuying Zhao, Hong Guo, Gangshu Cai, and Subhajyoti Bandyopadhyay. 2017. “The role of expectation-reality discrepancy in mobile service contracts,” Working paper. SSRN

Lin Hao, Hong Guo, and Robert F. Easley. 2017. “A mobile platform’s in-app advertising contract under agency pricing for app sales,” Production and Operations Management, Volume 26, Issue 2, pp. 189-202.