The next Entrepreneurship and Innovation Policy Research virtual seminar is Thursday, September 28, from 11:00-12:15 ET. Annamaria Conti (Instituto de Empresa) will present "The hidden costs of fairness in platform markets" (with Juan Santalo, Instituto de Empresa). Kevin Boudreau (Northeastern University) will discuss. Click HERE to register for the 9/28 seminar (abstract is below). We hope you join us.
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- Tim Folta (UCONN), Maryann Feldman (ASU), and Supradeep Dutta (Rutgers U)
Abstract: Multisided platforms are ubiquitous in our economy. While their success crucially relies on indirect network effects, it remains an open question how to strengthen these effects by expanding the breadth of platform transactions without undermining their quality. This paper examines the role of royalties as ex-ante screening mechanisms that incentivize developers of low-quality products to self-select out of the platforms in a setting with asymmetric information. We exploit the quasi-random announcement Apple made in November 2020 declaring it would have reduced the royalty rate applied to small app developers from 30\% to 15\%. In March 2021, Google followed suit, committing to a similar reform. We analyze the implications of these reforms using a difference-in-differences approach with product fixed effects. In doing so, we find a substantial increase in small developers' likelihood of releasing new apps on the iOS and Android platforms after Apple's announcement. These apps are disproportionately in the lowest quartile for the number of upvotes and ratings received, and revenue earned, indicating a surge in low-quality apps after the reforms are announced. Consistently, we detect a decline in small developers' likelihood of launching venture-backed apps. We additionally show that post-announcement, the marginal value of quality certification by external, experienced users increases, suggesting that there are positive costs associated with the increased supply of low-quality apps.
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