Entry of Platforms Into the App Market: How to Choose Optimal Licensing Modes Under Power Imbalances

Abstract

In this article, we examine the selection of the optimal licensing mode and the decision to enter an app market for a platform owner confronting app price competition from an app developer in various power structure imbalances. Specifically, the platform grants the app developer permission to offer apps for sale to users within its platform ecosystem via two licensing modes, i.e., an app sharing mode and a licensing fee mode. In addition, the platform may directly provide its own apps to users and compete with the app developer. By developing a game theory model, we analyze the strategic choices and pricing decisions of the two parties in various game structures. We find that when the app developer holds greater market power, only app sharing can be a win–win mode under a moderate level of sales costs. The platform always chooses to enter the market under the licensing fee mode, but it will strategically opt for whether to enter under the app sharing mode, contingent upon the magnitude of sales costs. Interestingly, a win–win outcome triggered by entry exists only under the licensing fee mode when the sales cost difference is large. In contrast, under the app sharing mode, entry always results in one member being disadvantaged, without achieving a win–win outcome. Under the licensing fee mode, it is intuitive that both parties benefit the most only when they act as leaders in the game and suffer the most when their competitors act as leaders. Counterintuitively, under the app sharing mode, both parties cannot only benefit the most when they act as leaders but also benefit the most when their competitors act as leaders.