Apple's agency model and the role of most-favored-nation clauses

The agency model used by Apple and other digital platforms delegates retail-pricing decisions to upstream content providers subject to a fixed revenue-sharing rule. Given competition both upstream and downstream, we consider how, under the agency model, retail prices depend on the firms' revenue-sharing splits and the degrees to which consumers view the platforms and the goods sold on the platforms to be substitutes. We show that the agency model may not be universally adopted even if adoption would mean higher profits for all firms. Use of most-favored-nation clauses in these settings can ensure industry-wide adoption and increase retail prices.