Merger Analysis in the App Economy: An Empirical Model of Ad-Sponsored Media

In the mobile app market, multiple monetizing policies such as paid and free ad-sponsored models co-exist. This paper proposes a novel model of ad-sponsored media with endogenous business model choice, that is applicable to the mobile app industry. The model defines an equilibrium over consumers’ downloads and usage decisions and app developers’ pricing and advertising decisions. The cost for a consumer to use an app is well defined regardless of the monetizing policy, enabling a Small, Non-transitory but Significant Increase in Cost (SSNIC) test for defining an antitrust relevant market. We estimate the model using mobile app data from Japan from 2015 to 2017. The SSNIC test shows that few non-game categories are relevant markets, whereas so are many game categories. The relevant market definition based on a full equilibrium simulation is aligned with this result. Furthermore, merger simulations show that the welfare damage is more pronounced in categories where the hypothetical monopolist's profit increases more in the SSNIC test, validating the use of SSNIC test as a convenient screening tool. Merger simulations suggest the importance of endogenous business model choice, because price increase is often caused by the shift from free to paid model. The endogenous business model choice also affects the implication of the platform transaction fee reduction. Contrary to the standard vertical relation, in the app economy, we find that a reduction in the transaction fee increases the price, because apps find it more profitable to charge price rather than show advertisements to consumers.