From Net Neutrality to Application Store Neutrality? The Impact of Application Stores’ Ranking Policies on Application Quality and Welfare
32 Pages Posted: 31 Mar 2017 Last revised: 17 Aug 2017
Date Written: August 15, 2017
We consider the impact of different ranking regimes in application stores, like Apple’s App Store or Google’s Play Store, on the quality of applications and welfare. Application stores are essential gatekeepers between application developers and users. In particular, previous empirical research has shown that the ranking position in an application store has a significant effect on the application’s demand, and thus, its success. Both Apple and Google have recently introduced sponsored search results in their respective application stores, allowing application developers to be listed higher in return for a ‘ranking fee’. We investigate the impact of sponsored rankings on app quality and welfare by means of a game theoretic model with a monopoly application store and two competing application developers that differ in their ability to develop apps. Overall, we find mixed results with respect to which ranking regime is more socially desirable. We show that quality-based rankings yield a higher average app quality and consumer surplus if the application store can observe the quality of apps perfectly. However, if app quality is only imperfectly observable, sponsored ranking can in fact lead to a higher average app quality, and to higher consumer surplus. However, we also show that under a sponsored ranking regime, the more efficient app developer benefits relatively more than under a quality-based ranking regime, which supports the concern that sponsored ranking favors the market players that already have an advantage.
Keywords: Application Store, Ranking System, Market Intermediation, Platform, Two-sided Market
JEL Classification: L15, L86, L42
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