José Ignacio Heresi, UAH

Paper: App-Store Commissions, App Business Models, and Investment

Abstract: We study the welfare effects of regulating app-store commissions when app developers choose endogenously between subscription-based and advertising-based business models. A higher ad valorem commission on subscription revenues induces some developers to switch to advertising. When consumers’ nuisance cost from advertising is sufficiently low, this switch benefits consumers and can raise total welfare; in this case, a commission cap reduces total welfare. We then allow the platform to undertake costly investment that raises consumers’ valuations of apps. Because investment affects developers’ business model choices, a commission cap may either increase or decrease platform investment. Our results show that accounting for platform investment does not always weaken the case for commission regulation.