The effect of risk aversion and financing source on a supply chain of in-app products

We study the decisions of a distribution platform and an app developer, both risk averse, which interact via a revenue-sharing contract under the freemium business model with optional in-app purchases. The model considers the random impact of quality on the demand potential of an in-app product, and we conduct the analysis under the mean-variance framework. We investigate two financing sources for the developer's activity: self-financing and revenue-based financing by an external investor. We reach three main findings: (i) The stochastic-dominance property exists both for the platform's and the investor's profits with regard to their revenue shares; (ii) the more risk averse the developer is, the more he tends to use revenue-based financing, but he will receive a lower financing amount; and (iii) the shift from self-financing to revenue-based financing lowers the platform's expected revenue.