Could competition between Apple’s App Store and Google Play be suffocating innovation rather than encouraging it? That’s the provocative suggestion of recent research by Doh-Shin Jeon and Patrick Rey. Supported by TSE Digital Center, it reveals how rivalry between platforms can harm society by choking the valuable work of app developers.
Why are policymakers worried about the fees imposed on app developers?
The main concern is that the high commissions charged by platforms will reduce the production of new apps by choking off the resources available for developers. The 30% fee charged by Apple and Google has prompted major disputes, such as the Epic Games legal battle, and triggered policy interventions around the world.
In their defense, platforms point to a common interest with their consumers in attracting apps. Their argument is that app stores use commissions to compete with each other and attract app providers. Regulators argue instead that app-store commissions are excessive because competition is limited due to consumer preferences and inertia, as well as switching costs and entrenchment strategies. Our research offers a drastically different perspective, namely, that platform competition may be the source of the problem, rather than a cure.
Policies like the EU’s Digital Markets Act aim to spur innovation through competition. Why might this be a mistake?
Our findings suggest that increasing competition is not a silver bullet. Regulators often assume that more competition leads to lower fees, but our research shows that under plausible conditions, competition can actually drive commissions up rather than down.
One of the most striking examples is China’s app store market. Unlike Western countries, where Apple and Google dominate, China has multiple competing app stores operated by phone manufacturers such as Huawei, Xiaomi and Oppo. In this intensely competitive market, these stores charge commissions as high as 50%.
Why does this competition harm app development?
We study a setting in which two-sided mobile platforms first compete on commissions for apps and then on handset prices for consumers. Consumers single-home and benefit from the platform’s service and apps, whereas app developers may single- or multi-home.
Our main finding is that platform competition can stifle app development. Specifically, we show that competition leads to higher commissions whenever raising one commission reduces the number of apps on the rival platform.
An app increases a platform’s profit in two ways: directly, through the commission it pays when a consumer buys it; and indirectly, by generating consumer surplus, which a platform can appropriate by increasing its handset price. As a result, when competing for consumers a platform benefits from a subsidy, equal to the total commission revenues and consumer surplus generated by its app store. Interestingly, platforms’ joint interest is therefore aligned with consumers’: they all wish to maximize these subsidies. When competing for consumers, however, a platform’s profit is increasing in its own subsidy but decreasing in its rival’s subsidy. When competing for apps, each platform then has an incentive to choose its commission not only to raise its own subsidy, but also to reduce its rival’s subsidy. This leads platforms to charge higher commissions than those that would maximize consumer surplus or joint profits – as well as higher than would maximize total welfare, including developers’ profits – whenever raising the commission diminishes a rival’s app base.
How are these patterns connected to economies of scope in app development?
Economies of scope in app development exist when the cost of developing an app for both platforms is smaller than the sum of the costs for each platform to develop the app separately. In such a context, app developers’ investment decisions are more likely to be driven by the overall profit that the developer can obtain from both platforms. This explains why most successful apps are present on all app stores. For instance, the UK competition authority estimates that 85% of the top 5,000 apps on Apple’s App Store also list on Google’s Play Store and vice versa. As an increase in one platform’s commission reduces the overall profitability, it is likely to also reduce the number of apps available on the rival platform; this, in turn, means that platform competition leads to higher commissions. The same logic applies to economies of scope arising on the demand side, as in the case of dating or delivery apps.
What can policymakers learn from these insights?
We must challenge the assumption that more competition between platforms always benefits developers. In some cases, it may be making things worse. Similarly, policies designed to foster interoperability – and, thus, economies of scope in app development – may result in higher commissions.
Fostering competition within platforms – such as allowing alternative app stores within Apple’s ecosystem – might be a more promising path forward. However, access conditions for rival app stores or for ‘side-loading’ apps from third-party websites must be carefully regulated and enforced. In South Korea, for example, Apple and Google were able to circumvent an exclusivity ban by imposing a 26% licensing fee on developers opting for third-party payment systems.
KEY TAKEAWAYS
• Competition is part of the problem – Platform competition and interoperability can lead to higher fees that deter app development.
• Evidence from China – With intense competition among Android app stores, commission fees are even higher than in the West.
• Policymakers must think again – It may be more effective to encourage competition within platforms rather than between platforms.
• Regulation should be cautious – Access conditions for rival app stores or ‘side-loading’ must be carefully regulated and enforced.
FURTHER READING ‘Platform Competition and App Development’ and other publications by these researchers are available to read on the TSE website. For an analysis of desirable access conditions, see ‘Fair Gatekeeping in Digital Ecosystems’ by Michele Bisceglia and Jean Tirole (2024).
Article published in TSE Reflect, March 2025
