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Saturday, September 9 • 5:12pm - 5:45pm
From Net Neutrality to Application Store Neutrality? The Impact of Application Stores' Ranking Policies on Application Quality and Welfare

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We consider the impact of different ranking regimes in application stores, like Apple’s App Store or Alphabet’s Play Store, on the quality of applications and welfare. Application stores are essential gatekeepers between application developers and consumers. In particular, previous empirical research has shown that the ranking position of an application in an application store has a tremendous effect on the application’s demand, and thus, its success. Both Apple and Alphabet have recently introduced sponsored search results in their respective application stores, allowing application developers to be listed higher in return for a ‘ranking fee’. This setting has some similarities to the net neutrality debate, where network providers are the essential gatekeepers between content providers and consumers, and where paid prioritization for content providers was heavily scrutinized. Similarly, here we investigate in the context of dominant application stores if it is reasonable to prohibit sponsored ranking in lieu of a “neutral” ranking policy that is based solely on the applications’ quality.

Specifically, we develop a game theoretic model with a monopoly application store and two competing, symmetric application developers, where every developer can invest in quality improvements of its application. The application store sets an entry fee for consumers (e.g., through the price of the device needed to access the store) and a maximal price that developers may charge from consumers. The consumer demand for an application that is not in the top position is normalized to zero. We then compare the sponsored ranking scenario, where the application store can, but does not have to, leverage a ranking fee from the application developers, to the neutrality scenario, where the application store cannot leverage an additional fee from application developers and ranks them according to their quality. We find in the ranking scenario, that the application store always has an incentive to introduce sponsored ranking and to rank the applications irrespective of quality. Nevertheless, we can show that a neutrality regulation can be detrimental for the application store, total welfare and surprisingly even for consumers. This is because application stores allow developers to take higher prices from consumers under the sponsored ranking scenario, which in turn gives them a higher incentive to increase application quality. At the same time, the application store lowers the entry fee for consumers, which increases consumer surplus. Overall, we can show that neutrality regulation can only be beneficial for welfare if the application store’s bargaining power with respect to application developers is low. This is because under the sponsored ranking scenario with low bargaining power, the application store has only low incentives to increase the maximal price, such that developers do not increase the quality of their applications enough to offset the possible loss in consumer welfare due to the excessive consumption of the lower quality application. We additionally show that these results are robust with two competing application stores.

Moderators
GL

Gavin Logan

National Urban League

Presenter
OZ

Oliver Zierke

University of Passau

Author
avatar for Jan Kraemer

Jan Kraemer

Full Professor, University of Passau

Saturday September 9, 2017 5:12pm - 5:45pm
ASLS Hazel Hall - Room 225

Attendees (7)