Estimating Demand for Mobile Applications in the New Economy

In 2013, the global mobile app market was estimated at over US $50 billion and is expected to grow to $150 billion in the next 2 years. In this paper, we build a structural econometric model to quantify the vibrant platform competition between mobile (smartphone and tablet) apps on the Apple iOS and Google Android platforms and estimate consumer preferences towards different mobile app characteristics. We find that app demand increases with the in-app purchase option wherein a user can complete transactions within the app. On the contrary, app demand decreases with the in-app advertisement option where consumers are shown ads while they are engaging with the app. The direct effect on app revenue from the inclusion of an in-app purchase and in-app advertisement option is equivalent to offering a 28 percent price discount and increasing price by 8 percent, respectively. We also find that a price discount strategy results in a greater increase of app demand in Google Play compared to Apple App Store, and app developers can maximize their revenue by providing 50% discount on their paid apps. Using the estimated demand function, we find that mobile apps have enhanced consumer surplus by approximately $33.6 billion annually in the US, and discuss various implications for mobile marketing analytics, app pricing and app design strategies.