Working Papers
Working Papers
This paper quantifies the welfare effects of regulating commission fees in digital platforms, focusing on third-party app developers' innovation and pricing decisions. I employ a comprehensive dataset of music apps within Apple's App Store in the United States from October 2018 to February 2024 to estimate app users' demand and app developers' cost parameters. The paper reveals key findings with three policy counterfactual simulations where I sequentially solve for optimal innovation and pricing decisions. First, capping commission fees stimulates third-party developers’ innovative efforts and improves social welfare. Second, when the platform adds a unit fee scheme under the fee cap, developers partially pass unit fees onto app users by increasing in-app purchase prices. Third, a hypothetical buy-out of a streaming app by the platform leads to a significant decrease in the innovative efforts and market share of the acquired app. Notably, welfare analysis without quality adjustment is predicted to underestimate the impact of fee cap on social welfare by 0.91% - 2.06% points compared to the full-stage model estimates. This research highlights the importance of considering quality changes along with price effects when evaluating regulatory intervention in digital platforms.
Firms often choose with whom to compete and how similar or how different their products should be relative to those of their rivals. This paper investigates this issue in the app economy by studying the determinants of mobile app success. We leverage natural language processing and unsupervised machine learning to cluster apps using pairwise cosine similarity, which provides a measure of horizontal differentiation within app categories. We find asymmetric effects of rivalry from first-party apps: Apple’s entry into a cluster stimulates sales of third-party apps, whereas Google’s entry decreases them. We also find that apps in a cluster that more closely resemble the most popular apps have fewer downloads, whereas greater similarity to average competitors enhances downloads. We further find that more frequent updates increase app downloads. These findings yield important implications for developers in choosing market segments and designing effective differentiation strategies.
This paper examines the welfare implications of the platform's vertical integration into downstream markets, focusing on the platform’s incentive to foreclose third-party sellers by raising commission fees. I present a three-stage theoretical model of the mobile app marketplace to analyze the platform’s dual role as both a gatekeeper and competitor. The model shows that the platform entry puts competitive pressure on third-party developers, reducing their profits. The competitive effects of entry intensify with the quality level of platform-owned apps. This weakens the platform’s commission revenue stream, creating an incentive to raise fees that eventually foreclose the marginal developers who have low-quality apps. Such foreclosing behavior of the platform results in restricting market diversity and harming consumer welfare. However, when consumer heterogeneity is high, the platform has less incentive to foreclose developers, mitigating the negative effects on consumers. In addition to theoretical findings, I conduct an empirical analysis using data from the Google Play Store.