Product Development and Platform Fees Design

Abstract

Digital platforms often adopt a 30% commission rate on all transactions, a practice that has raised public and antitrust concerns due to its potential negative impact on software developers’ innovation incentives. This paper examines how various commission schemes affect product development decisions in the digital market. Using a unique dataset from a leading video game platform, we implement pretrained language models to classify software updates into major feature updates and minor bug fixes. We then construct and estimate a structural model of developer and consumer behavior, accounting for the dynamic nature of product development decisions and their associated costs. Our counterfactual analysis reveals that while uniform reductions in commission rates can stimulate more updates, they come at the cost of considerable platform revenue loss. The estimated increase in revenue from higher quality due to the updates is small relative to the revenue loss to the platforms (and associated gain to the developers). We find that a tiered commission structure, similar to Small Business Programs, can reduce the impact on the platform while continuing to incentivize substantial innovation.