In-app Ad Intensity vs. App Quality, Versioning, and Interaction with Ad Mediation Platform

In-app advertising stands as a favored monetization approach for app developers, whereby they receive compensation for displaying ads within their apps, and a majority of mobile app developers' revenue is generated from in-app advertising. Yet, this monetization strategy harms the app's quality attribute, such as usability, resulting in users leaving. In contrast to tangible products, mobile apps are characterized by agile quality, as app developers widely adopt version update practices. Such a strategy is affected by the app users' reference sensitivity (i.e., users' tendency to compare current app performance (such as app quality or ad intensity) against a reference point (i.e., past performance). To adopt the in-app advertising monetization, the app developer interacts with an ad mediation platform that helps hir to manage multiple ad networks on one centralized platform. Revenue generated by the app is shared between the app developer and the ad mediation platform. We investigate the quality and the advertising decisions of an app developer who develops and launches hir app at the beginning of the first period (stochastic environment) and releases a new version of this app at the beginning of the second period, when the uncertainty of demand is revealed. The goal of our research is to investigate how the app users' reference sensitivity and the developer's attitude toward risk affects the app quality and the intensity of the ads over two periods. We build a game-theoretical model and use the methodology of stochastic programming to explore the decisions of the app developer and the ad mediation platform under the mean-variance framework. Several counterintuitive properties of the equilibrium are obtained.