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Contract design on digital platform for the risk-averse retailer with moral hazard: Wholesale price vs two-part tariff

Zhenhong Li (College of Management and Economics, Tianjin University, Tianjin, China)
Bo Li (College of Management and Economics, Tianjin University, Tianjin, China)
Yanfei Lan (College of Management and Economics, Tianjin University, Tianjin, China)

Kybernetes

ISSN: 0368-492X

Article publication date: 15 December 2017

Issue publication date: 16 March 2018

517

Abstract

Purpose

The advent of e-commerce has prompted the proliferation of digital platforms for virtual products. This reinforces the importance of the contract design problem between the virtual product supplier (he) and the digital platform retailer (she). The purpose of this paper is to investigate a principal-agent problem in a virtual product supply chain, in which the retailer’s sales-effort investment level to sell the virtual product is unobservable to the supplier, and the market demand is unknown to both parties.

Design/methodology/approach

In this study, the supplier designs two kinds of contracts (wholesale price contract and two-part tariff contract) to maximize his profit, while the retailer determines her sales-effort investment level and the virtual product’s retail price. The results of two different types of contracts are compared to explore in depth the effect of contract choices on the participants’ profits.

Findings

The authors show that the comparative results of the optimal wholesale prices, retail prices and sales-effort investment levels between these two kinds of contracts all rely on the retailer’s risk-averse degree. Specifically, both the supplier and the whole supply chain prefer the two-part tariff contract rather than the wholesale price contract, the retailer should do opposite when she is low risk-averse, whereas there is no distinction for the retailer’s utilities between these two kinds of contracts when she is more risk-averse.

Originality/value

The value of the research rests on the use of principal-agent theory in the contracts of virtual products considering the retailer’s sales-effort and risk-aversion degree. The research will serve as a guide for the virtual products’ supplier and the platform retailer in decision-making processes.

Keywords

Acknowledgements

The authors are grateful to the Co-Editor and the anonymous reviewers for their helpful comments and suggestions. This research was supported by the National Nature Science Foundation of China under Grant No. 71472133.

Conflict of interests: the authors declare that there is no conflict of interests regarding the publication of this paper.

Citation

Li, Z., Li, B. and Lan, Y. (2018), "Contract design on digital platform for the risk-averse retailer with moral hazard: Wholesale price vs two-part tariff", Kybernetes, Vol. 47 No. 4, pp. 716-741. https://doi.org/10.1108/K-05-2017-0177

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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