Mobile Application Pricing

Joshua Gans
May 2011
Emergence of Mobile Platforms
 Process

Revenue Sharing
Exclusivity Purchase a
Most favored device
customer clauses

Set Platform Purchase

Developer Platform Set App Prices Purchase App
Terms Access

What motivates the ‘balance’ of platform and app pricing?

Why might platforms impose restrictive conditions?
Why purchase access?

Direct access Platform access

 Model Set-Up
•  Consumer utility
•  Direct access: v – x – t – p
•  Platform access: v – x – P – p
•  h: share with high transaction cost
•  x and t independently distributed
x ! U[0,1] t !{ t , t }

$
d( p) = #
( ) (
" (1! h) v ! t ! p + h v ! t ! p ) if
v!t & p
$% v! t ! p v!t < p
 Direct Access
•  No app costs
•  Single app provider
•  Two possible outcomes:
t " t "v )
Cover market p* = 12 (v ! (1! h)t ! ht ) h ! (v" t()(2
t " t )2

t ! t !v )
Low only p = (v ! t)
* 1 h < (v! t()(2
t ! t )2
2
 Platform Only
•  Timing
1.  Set ad valorem revenue share to platform, a
2.  Set platform access price, P
3.  App provider chooses price, ρ

•  Suppose platform marginal cost is c
•  Result: For c sufficiently low, unique
equilibrium involves P = 0, ρ = v/2 and a close
to l. Platform only provided if v ≥ 2c.
 Intuition
!

!ˆ

! =v"x

! =v"x"P
x
 Independent Pricing
•  Suppose that both direct access and platform
access are available
•  With independent pricing, the app provider can set
p and ρ separately
•  Result: Platform only intuition carries over and
unique equilibrium prices are the same.
–  There is no direct access
–  a is constrained so that app provider earns direct
access profits
–  Platform only provided if av ≥ 2c
Evidence of unraveling?
 Variations
•  Exclusivity: platform exclusivity would generate the
same outcome
•  Capped retail price: Amazon caps retail price at $9.99 if
want 70% sharing, otherwise 35% share.
•  Linear wholesale prices set by app provider and
platform retail prices (old Kindle model)
–  In equilibrium, P = 0 and retail price is (3/4)v
•  Integrated platform features
–  Suppose that independent of app usage, consumers value
platform access at Δ
–  Unique equilibrium involves P = Δ and ρ = v/2
–  Still cost independent
 Benchmark: Full Integration
•  Firm only wants to sell to high types on the
platform (optimal if t < c)
•  Firm sells to all on the platform (optimal if t > c)
! + P = 12 (v + c)
•  Thus, without integration, platform prices are ‘too
low’ and result in potential over-use if t < c.
•  If there are fixed costs associated with platform
development, may be cases where it is not
developed when it is socially efficient.
 Equilibrium with P > 0?
•  Suppose platform improved reader experience
(lowered transaction costs even for direct access)
–  In equilibrium ρ > p (all direct access if a > 0)
–  Unraveling will still occur for P < t
–  For P > t, there exists an equilibrium with a positive P.
The app provider has some consumers who do not
have platform access and this constrains its direct
access price
–  But if h is too high, the app provider switches to
supply only on the platform and unraveling occurs.
•  Platform subscriptions: pricing of complements
game.
 Most Favored Customer Clauses
•  Apple and Amazon require ρ ≤ p
•  When P = 0, an MFC does not bind
•  What happens when P > t?
–  App provider’s price constrained by direct access
consumers
–  For low h, equilibrium involves a = 1 and P > 0
–  For high h, for low a, app provider can replicate direct
access profits by setting its price equal to the pure direct
access price. In equilibrium, it will price higher.
•  For low h, MFC will be welfare improving. For high h,
low transaction cost types will be worse off and may
prefer platform access option not to exist.
 Conclusions
•  Non-trivial unraveling problem in providing
platform access with independent app pricing
–  Constrains platform price to be 0 (independent of
cost)
–  May result in over-use of platform and too little
appropriability
•  Contract restrictions on app providers may
increase profits and possibly welfare