Research On Incentive Contracts In Hardware Platform With Software Quality Improvement

As an emerging business model,the platform model has been changing human life on a large scale and in depth.As a kind of two-sided platform,the hardware platform,like smartphone platforms and game console platforms in our daily life,also plays an important role in it.There are three types of participants in the hardware platform ecosystem: hardware vendors,software vendors and consumers.In the ecosystem,the hardware vendors sell hardware to consumers and provide interface to software vendors;the software vendors sell software based on hardware platforms and pay license fee to hardware vendors;consumers need to purchase hardware before purchasing software on the hardware platform.Two kinds of externalities exist in the hardware platform: sales externality between hardware and software,and quality externality between different software.Considering these two kinds of externalities,this paper builds a hardware platform model with one hardware vendor and two software vendors,then identify the motivation of hardware vendor to incentivize software vendors and design a three-part incentive contract to achieve it.First,this paper builds a hardware platform model with one hardware vendor and two symmetry software vendors,then studies the market equilibrium and vendor profits in both decentralized and centralized structures.Then we identify the motivation of hardware vendor to incentivize software vendors and design an effective license fee contract based on three-part pricing contracts.Results show that an appropriate three-part incentive contract can always help vendors in decentralized platform achieve the Pareto improvement.Second,this paper considers situation where hardware vendors can only incentivize some software.Firstly,we identify the motivation of hardware vendor to incentivize only one software vendor,and design a partial three-part incentive contract;we further extended the model to two scenarios: asymmetric demand complementarity between software and hardware,and asymmetric quality externality between different software.In these two scenarios,we study the strategies of hardware vendor in selecting incentive objects and the design of partial three-part incentive contracts.Results show that the hardware vendor should incentivize at first the software vendor with larger demand complementarity,or with larger absolute value of quality externality.Finally,we extend the model to a competitive situation between two symmetric hardware platforms.We study the market equilibrium and corporate profits under different platform competition modes and discuss the incentive contract selection strategies of hardware platforms in various situations.Then we identify the evolution process of incentive contract competition game and analyze the final equilibrium.Results show that the hardware platform competition eventually converge to the Nash equilibrium where both hardware vendors adopt incentive contracts,but in some case the equilibrium is a prisoner's dilemma.