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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. The authors 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, the authors 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.

01
Dec
2021
Wednesday

Session Chair: Daniel XU
Professor of Economics, Duke University

10:00 am
Merger Analysis in the App Economy: An Empirical Model of Ad-Sponsored Media

Kohei KAWAGUCHI, Assistant Professor, Department of Economics, School of Business and Management, Hong Kong University of Science and Technology

Co-authors:
Toshifumi KURODA, Associate Professor, Department of Economics, Tokyo Keizai University
Susumu SATO, Assistant Professor, Research Division of Theories in Economics and Statistics, Institute of Economic Research, Hitotsubashi University
10:25 am
Discussion
Discussant:
Ying FAN, Associate Professor of Economics, Department of Economics, University of Michigan
10:50 am
Q&A
11:10 am


Updated 9 Nov 2021

Speakers

  • Kohei KAWAGUCHI

    Kohei KAWAGUCHI

     

    Assistant Professor, Department of Economics, School of Business and Management, Hong Kong University of Science and Technology

    Kohei Kawaguchi is an assistant professor of Department of Economics at Hong Kong University of Science and Technology. He received his PhD in Economics from London School of Economics. His research interests include empirical industrial organization and quantitative marketing.

  • Ying FAN

    Ying FAN

     

    Associate Professor of Economics, Department of Economics, University of Michigan

    Ying Fan is an associate professor in the Economics Department at the University of Michigan. She got her Ph.D. degree in Economics from Yale University in 2009. She is a member of the National Bureau of Economic Research (NBER) and the Center for Economic and Policy Research (CEPR). Her main research interest is empirical Industrial Organization.

  • Daniel XU

    Daniel XU

     

    Professor of Economics, Duke University

    Yi (Daniel) Xu’s research focuses on Productivity, International Trade, and Industrial Organization. He has received numerous grants from the National Science Foundation, the Private Enterprise Development in Low-Income Countries, and the NET Institute. His most recent work has been published in the American Economic Review, Management Science, the Review of Economic Studies, the Rand Journal of Economics, the Review of Economic Dynamics, and the World Bank Economic Review. He is currently working on projects that explore innovation, productivity, exporting and industry dynamics, with a special focus on emerging economies such as China, Colombia, Taiwan, Korea, and Turkey.

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Agenda