App platform model

Abstract

We model a software application platform selling devices to consumers and collecting percentage commission over in-app purchases. Apps are complements, differ in their quality and consumers differ in their unit benefit from app quality. App developers decide whether to develop an app (incurring a fixed cost) and choose their in-app purchase price. Consumers decide to buy a device and how much to purchase in each app. We show that the platform’s pricing results in insufficient consumer engagement and app entry, compared to levels that would optimize consumer surplus or app surplus. A cap regulation on commissions harms consumers and benefits app. Allowing apps to use a third-party payment channel effectively mirrors a zero-commission cap. If the platform introduces its own apps replacing some highquality (infra-marginal) apps, it sets a lower commission and higher device fee resulting in lower consumer participation, more app entry at the margin and higher profits for the remaining apps, whereas replaced apps lose.