The role of the distribution platform in price formation of paid apps

Abstract

Mobile software applications have become important components of people’s everyday life. In fact, numerous industry studies report that the app market is soaring. In this paper we study the role of the distribution platform as an important determinant of price of paid apps. We also examine whether the price implications of developers’ strategic decisions at the app level hinge upon the targeted distribution platform. To these purposes, we construct a hierarchical model of price formation by using an ad-hoc panel dataset consisting of top paid apps from the two major app stores, namely Apple’s App Store and Google Play. Our findings show that prices of paid apps strongly depend on the platform where the apps are marketed. Specifically, the App Store is associated with lower prices for paid apps than Google Play. We find evidence that this is because the impact of cross-store differences in in-store developer competition prevails over the impact of cross-store differences in average consumer willingness to pay. We also find that price premiums as a return to trialability are more likely to emerge in Google Play than in the App Store, and that developers are more likely to adopt a penetration price strategy in Google Play, arguably because the price implications of these decisions heavily rest on the willingness to pay of consumers in the store. Finally, our evidence does not confirm the argument that a more marked price reduction for paid apps operating as two-sided markets should be observed in Google Play.