A model of mobile app and ad platform markets

Abstract

The mobile application (app) economy comprises two distinct platform markets through which app developers generate revenue: app platform and ad platform markets. When developers monetize their apps by charging users (or through in-app advertising), they must pay commissions to the app platform (or ad platform). Both platform markets are interconnected, as developers choose which market to use for monetization (paid or ad-funded). The model shows that app and ad platforms are substitutes for app developers. Thus, an imbalance between app and ad commissions induces some developers to choose inefficient business models. For example, if the app commission is lower than the ad commission, some ad-friendly developers may choose the paid business model even though they could generate a greater surplus from advertising from a social welfare perspective. This finding highlights the benefits of distinct platforms setting similar commissions. The model is also used to evaluate the impact of a non-price strategy implemented by the app platform to limit the ability of app developers to monetize through advertising. The analysis shows that the app platform can use this non-price strategy to increase its demand at the expense of the ad platform.