Mobile Application's Quality and Pricing Decisions under Competition

ABSTRACT In this article, we investigate the pricing and quality decisions of mobile applications (apps) by the platform owner and third‐party app developer. The third‐party app developer shares some fraction of revenue with the platform owner. We investigate the impact of revenue sharing fraction on quality enhancement and pricing decisions. One would expect that, as the revenue sharing fraction earned by the platform increases, the platform's effort toward enhancing the quality of her app should increase. However, our analysis reveals that when the third‐party app developer's cost structure is high (/low), and the difference between initial app quality valuation of the platform's app and developer's app is high (/low), then the platform decreases the quality improvement efforts. Similarly, we also find that if the developer's revenue‐sharing fraction increases, he may also decrease the quality efforts. Later, we also analyze the scenario where a platform can influence the competing developer's app quality. We find that if the platform's effort only influences the competing third‐party developer's app quality, then the platform reduces the rival's app quality. Finally, in our analysis, we find that if the platform's effort toward the rival's app also enhances her app's quality, she may increase the rival's app quality.