Network Externalities and App Store Fees in Mobile Platforms

71 Pages Posted: 28 Aug 2021 Last revised: 9 Jan 2024

See all articles by Amandeep Singh

Amandeep Singh

University of Washington - Michael G. Foster School of Business; University of Pennsylvania - The Wharton School

Kartik Hosanagar

University of Pennsylvania - Operations & Information Management Department

Aviv Nevo

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 26, 2021

Abstract

The benefits consumers get from a mobile phone depend on the software apps available to use on that phone. This creates an interdependence between the demand for handsets and the demand for software apps. To quantify the importance of these indirect network externalities, we develop a model of consumer demand for handsets and apps, as well as a model of developer entry decisions. We estimate the model using a unique dataset of mobile phone sales and app downloads. We find that a 1% increase in the number of apps results in a 1.5% increase in smartphone sales, with significant heterogeneity in this network externality between apps on platforms. To illustrate the applicability of the model, we compute the equilibrium platform fees for Apple and Android. We find that the complementarity between the handset sales and app demand implies lower platform fees with Apple's tight vertical integration. We estimate that increasing the strength of indirect network externalities by 10% results in a decrease in optimal fees by 2.5% for Apple and 0.5% for Android indicating a tight coupling of the two sides of the market for Apple, compared to Android.

Keywords: Platform Competition, Indirect Network Effects, Online Marketplace, Two-sided Markets

JEL Classification: L1

Suggested Citation

Singh, Amandeep and Hosanagar, Kartik and Nevo, Aviv, Network Externalities and App Store Fees in Mobile Platforms (August 26, 2021). Available at SSRN: https://ssrn.com/abstract=3911638

Amandeep Singh (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Kartik Hosanagar

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

Aviv Nevo

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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