How do Internet of Things Service Pricing Schemes Affect Compatibility Investment between Platform and Smart Device Manufacturer?

The development of the Internet of Things (IoT) has rapidly progressed, revolutionizing numerous industries and transforming how we interact with technology. IoT relies on seamless connectivity between devices, allowing them to collect, share, and analyze data. As a result, compatibility and connectivity have become major concerns for customers adopting smart devices. Achieving compatibility in a smart device is a shared responsibility between the IoT platform provider and the smart device manufacturer. However, the impact of their respective efforts on smart device compatibility depends on investment efficiency and the service level. In this study, we develop a game-theoretical model to examine how investment efficiency affects the incentives of the upstream platform and the downstream manufacturer to exert compatibility efforts under the licensing pricing and revenue sharing models in a supply chain setting. Our findings indicate that, given a certain IoT platform service level, a manufacturer's effort decreases as the relative weight decreases in the licensing pricing model. Additionally, when the platform's effort cost is lower, the platform can invest more in compatibility, thereby improving the compatibility of smart devices. In such cases, the manufacturer can benefit from the platform's incentives to exert compatibility efforts by reducing her efforts. We also identify two effects: the compatibility effect and the service value-added effect. When the relative weight of compatibility is small, the role of platform compatibility diminishes. Consequently, the platform cannot increase technology licensing fees to augment IoT service income, reducing profits. Our results also provide insights into how an IoT platform provider can strategically target a particular IoT service based on their cost characteristics and service level in smart device supply chains.