Spillover Effects and Freemium Strategy in the Mobile App Market

53 Pages Posted: 26 Mar 2018 Last revised: 25 Jan 2022

See all articles by Yiting Deng

Yiting Deng

University College London

Anja Lambrecht

London Business School

Yongdong Liu

University College London - School of Management

Date Written: September 9, 2021

Abstract

“Freemium” whereby a basic service level is provided free of charge but consumers are charged for more advanced features has become a popular business model for firms selling digital goods. However, it is not clear whether the launch of a free version helps or hurts the demand of an existing paid version. The free version may allow consumers to sample the product before making a purchase decision and subsequently increase demand of the paid version but it may also cannibalize demand of the paid version. We use a comprehensive data set on game apps from Apple's App Store that tracks the launch of both the paid and the free versions of individual apps on a daily level, to identify whether a freemium strategy stimulates or hurts demand of an existing paid version. We estimate the spillover effects between the free version and the paid version of the same app accounting for app-level product heterogeneity. We find that the launch of a free version increases demand of the paid version of the same app and present multiple robustness checks for these results. We then present evidence that the results are driven by consumers sampling the free version as well as enhanced app discovery, and demonstrate the relative importance of the two mechanisms.

Keywords: Freemium, Mobile App, Spillover Effect, Cannibalization, Sampling, Discovery

JEL Classification: C21, D12, L15, M31

Suggested Citation

Deng, Yiting and Lambrecht, Anja and Liu, Yongdong, Spillover Effects and Freemium Strategy in the Mobile App Market (September 9, 2021). Available at SSRN: https://ssrn.com/abstract=3149550 or http://dx.doi.org/10.2139/ssrn.3149550

Yiting Deng (Contact Author)

University College London ( email )

Level 38, 1 Canada Square
London, Please Select E14 5AA
United Kingdom
2031086081 (Phone)

Anja Lambrecht

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom

Yongdong Liu

University College London - School of Management ( email )

Gower Street
London, WC1E 6BT
United Kingdom

HOME PAGE: http://yongdong.liu@ucl.ac.uk

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