Product Development and Platform Fees Design

48 Pages Posted: 28 Nov 2023

See all articles by Wei Lu

Wei Lu

Zicklin School of Business, Baruch College - The City University of New York

Avi Goldfarb

University of Toronto - Rotman School of Management

Nitin Mehta

University of Toronto - Rotman School of Management

Date Written: October 30, 2023

Abstract

Digital platforms often adopt a 30% commission rate on all transactions as the rule-of-thumb rate. Such commission scheme has raised public and antitrust concerns in recent years, fearing that a 30% rate hurts innovation incentives of software developers. Nevertheless, empirical evidence of on this topic remains limited. Using a unique dataset of product development in a public beta testing program at a leading video game platform, we study how commission schemes would change the product update decisions and the full-release decisions of developers. We use pre-trained language models and supervised machine learning algorithms to classify updates into Feature, Regular, and Bug fix updates, and document positive correlations between past product updates and consumer demand and between past demand and updates and current release decisions. Motivated by these facts, we construct and estimate a structural model of developer and consumer behaviors on platforms and find substantial costs for product development. The counterfactual analysis shows that lowering commissions can lead to more updates, fewer games will be released, leading to an over-investment in beta testing. The platform revenue will decrease as the increase in future consumer demand driven by innovation cannot compensate for loss in commissions.

Suggested Citation

Lu, Wei and Goldfarb, Avi and Mehta, Nitin, Product Development and Platform Fees Design (October 30, 2023). Available at SSRN: https://ssrn.com/abstract=4617897 or http://dx.doi.org/10.2139/ssrn.4617897

Wei Lu (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

Avi Goldfarb

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8604 (Phone)
416-978-5433 (Fax)

Nitin Mehta

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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