Competing with Superstars in the Mobile App Market

Résumé

Firms considering to enter into online markets face significant demand uncertainty. It is not clear what type of product is going to be successful as there are many potential niches. They also face consumer search costs, with consumers most likely finding previously successful products in the market. This leads to a trade-off for potential entrants. Consider the appearance of a new very popular product (``superstar") in a particular niche. The popular product resolves demand uncertainty and reveals that there is demand for these products. At the same time, consumers looking for products in the newly popular niche will be more likely to find the superstar product. The interaction between these two forces could result in too much entry by low quality products, or not enough entry. I empirically examine these effects using 2012-2013 data on mobile games in the Android mobile app store. I show that a new superstar product deters the creation of similar products when search is difficult, but encourages entry when search is easier.